Monday 9 March 2020

Could the FOMC be a turning point next week and whats the outlook for bonds?

The FOMC is next Wednesday and I expect they will cut 50-75bps and restart QE. That should put an interim floor under markets and set up a bounce for a few months at least towards the election. 

So while liquid markets will probably sell off more this week and into early next week, for less liquid markets like credit, when you look back in a few months time, the stress this week might turn out to have been the ideal buying entry point.

Turning to government bonds, UK Gilts have almost reached zero yields. With the UK government able (and now willing) to borrow for 10 years for less than 10bps, Boris Johnson could spend £100bn on infrastructure for about £100m a year in interest. 

The UK and the US and even the EU are not Japan. Why would anyone choose to own a zero returning duration asset? Only as you think you can sell it at a higher price to someone else later. Thats the definition of a speculative bubble/ ponzi scheme. 

With western politics pointing towards wage inflation/ MMT, these bonds will turn out to be absolutely terrible medium term investments.

Central Banks either cant spot or choose to ignore asset bubbles. Well this one is right in front of them, in investment grade duration.

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