There's so much shite out there predicting what will go
up first is a 64 million dollar question
The only thing for sure is that increasing interest rates will weed out the worst offenders
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Are we headed for a bond market bloodbath?
The greatest bull market in history is over. Last week's rise in US interest rates confirms the reversal of a 30-year trend, and that spells big trouble according to some Cassandras.
There have been bumps in the road along the way but the market for bonds - IOUs issued by governments, banks and companies to raise money - has headed pretty much in one direction for those 30 years.
As the dragon of inflation which roared in the 1970s has been slain, the predictable returns of bonds - their "fixed income" - has been less prone to erosion by higher prices and so they have become more and more attractive.
The recent threat of a global financial meltdown stoked the long-term bond buying frenzy in two ways: First, it led to a rush for the safest investments in the world. Some safe-haven investments - like German government bonds - became so popular people were prepared to accept a negative return (essentially paying £11 for a £10 note) knowing that if the proverbial really hit the fan they at least trusted the German government to give them most of their money back.
That rush to safety was further compounded as governments around the world pumped trillions into the financial system by printing money and using it to buy bonds from their existing owners (usually banks). The supply of money exploded and the stock of safe bonds available to buy shrank. Bond prices rocketed.
Different this time?
It's important to recognise that every few months for the last five years someone has said they think it's all over. Every few months they have been wrong and borrowing costs have headed down again.
But there are reasons to think that this recent fall in bond prices means it is over now.
Folks are selling bonds and buying shares.
Inflation, the mortal enemy of bonds, is on the rise around the world. That makes it more sensible to be in company shares as their value reflects the higher prices they are charging for their goods and services.
Hence stock markets have surged while bonds have fallen.
Disorderly
So what? - all perfectly normal and part of cyclical nature of economies? Perhaps not.
Such has been the magnitude of the bond buying binge, there are real concerns that its reversal will not be orderly.
For one thing, there is the issue of liquidity.
That's a measure of how much of something you can buy or sell without changing its price.
Oil, for example is a liquid market. It is needed all round the world so there are plenty of willing buyers and sellers.
You can buy or sell it by the tanker load without pushing the price up or down.
But even liquid markets can be tested by a couple of enormous sellers.
If you had bought 30% of the world's oil, you would find it pretty difficult to sell it again without pushing the price down.
That is exactly what the Bank of England did with UK government bonds - it bought over a third of them. Stock like that can't be shifted without a bit of sale.
http://www.bbc.co.uk/news/business-39325794
