Bond Market Meltdown Continues With No Buyers – Bitcoin Magazine
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Looking for the marginal bond buyer
Where are the bond buyers? As central banks around the world continue their efforts to unwind their balance sheets, demand for government debt is falling everywhere you look. In fact, the Bank of England (BoE) was forced to buy more bonds this week, a continued expansion that is a clear sign that right now central banks have been (must be) the only marginal buyer in the room.
Every day we check the yield on government debt; every day they go higher. The only dynamic that has reduced interest rates or kept them flat in the short term is the announcement of interventions by the BoE, BoJ and ECB. So far, these efforts have proven to provide only temporary relief. We are likely to see any “temporary” liquidity boosts become more long-term policies as larger issues (such as the insolvency risk for UK pension funds) come to the surface. Central banks still appear to be using interest rate hikes until inflation is much closer to their 2% target, so we could easily see restrictive interest rates continue while central banks suddenly buy bonds as various liquidity crises arise.
Government bond yields continue to rise, even with announcements of government intervention
Realized volatility i British government bonds are now even higher than bitcoin. That said, bitcoin volatility is at one of the lowest levels in history (suggesting that a big move is coming) while bond volatility everywhere continues to rise.
Most worrisome is the decline in purchases of US Treasuries across major groups: commercial banks, foreign institutions and the Fed. Many do not want to go in and buy until we see the Fed’s next policy move for fear that interest rates have not peaked. Many cannot buy as a strong dollar and subsequent decline in other major currencies has also forced foreign buyers out of the market. Countries have been treading down their foreign exchange reserves to defend their own currency’s purchasing power instead.
Many cannot buy Treasurys as a strong dollar and declines in other major currencies have forced foreign buyers out of the market
Ultimately, what we need to see to reverse this explosion and the unprecedented rise in interest rates globally is a wave of marginal purchases of government debt outside of domestic governments. Otherwise, the market tells us that bond prices must be lower (and interest rates higher) for bonds to be seen as an attractive investment and allocation right now. As shown by the chart below, we are headed for one of the worst return years in history – a once-in-a-century regime change.
This is one of the worst years in history for bond yields
The other argument against the lack of bond buying right now is that there will be soon. Either via a deflationary gift that makes inflation much lower, a lack of US government security in the market during a margin call or new regulations that force new buyers – such as commercial banks or pension funds – to hold more US debt against their will.
But right now, many are asking what to do with these “safe” or “risk-free” assets when they no longer appear to be safe, appear to carry more risk and are imploding with volatility.
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