As the lyrics say in Yazz’s famous song “The Only Way is Up” many an economist would have you believe the same is true of US bond Yield Curve. Money printing leads to inflation which leads to higher interest rates they will tell you. However, one of my favourite market commentators is singing from a different song sheet that could have the title “The only way is Down!!”
Albert Edwards, Chief Strategist at Societe Generale recently went on record explaining why he expects bond yield to actually drop at the end of QEII. In a nutshell – Edwards is as bearish as they come – things are going to get so much worse and for so much longer, due to the after effects of a credit collapse and the resulting anaemic growth, that bonds will continue to be sought after and bond yields will reach new lows.
Your analysis and ultimate view on future US bond yields has obvious consequences on your analysis of which way the US dollar is headed. Do investors want the perceived safety of a US bond? If they do, then they’ll need US dollars to purchase them so the US dollar should appreciate, hence we should be able to deduce that Edwards would endorse purchasing US dollars.
Of course if Edwards has scared you too much with all his bearish negativity, then perhaps solace can be found in one of the most admired (including by me) bond investors in the world, the aptly named “Bond King” Bill Gross. Gross founded and runs PIMCO, the world’s largest bond fund with over a trillion dollars under management. Gross as recently as April this year was busy selling all his US bond holdings, as, in short, he thinks the USA is fundamentally bankrupt and the game is over. So far this view has cost him hundreds of millions of US dollar profits but he’s sticking to it.
Plenty of solace there….
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