The Coming Bond Bubble (Is Going to be Huge)

Europe is on the ropes as investors shun peripheral euro-area government debt. In the United States, interest rates are fixed at zero, and government bonds are arguably already quite far along in an epic 30-years-and-running bull market.

Given the state of global debt markets and the apparent lack of value across the investment landscape, it’s easy to see why interest has turned to emerging economies.

via Business Insider.

So begins an article that’s no where near long enough to explain what’s really happening.  It’s just the facts; the analysis is missing.  I’m not economist but here’s how I see this:

Gabriel Sterne, an economist at the frontier-market brokerage firm Exotix, told Business Insider, “You get some of these big funds – a lot of the funds in the States – just getting these inflows every month. What do they do with them? They tend to just double up and put them in [emerging markets].”

Sterne went on, saying, “In the absence of any bad news, there is not enough supply out there, so yields just fall down.”

UBS rates strategists Bhanu Baweja, Stephen Mo, and Nicholas Smithie were lamenting the lack of “distressed” investment opportunities around the world right now – given all of the recent interest in EM debt and assets – in a note to clients Wednesday.

The strategists highlighted a major dilemma that investors in emerging markets now face:

Consumer staples in EM trade at 20 times future earnings. Mexican stocks are 33% above pre crisis highs, South African equities are impervious even as the weakness in the labour markets become manifest. Implied currency volatility is at post crisis lows despite the trade cycle remaining very weak.

10 year paper of some non investment grade sovereign names in Asia trades at a spread well below 100 bps. Ukraine debt has been amongst the top performers in recent months with little to show for it from within the country. Bolivia can issue 10y paper below 5 pc. We can honestly say that we would not have predicted 5 years back that this day would come.

There are worse things in life than being an asset manager sitting on continued inflows, but given where assets trade, security selection can’t be that straight forward today. Are things getting silly, and if so, is that true across all asset classes? Is anything still distressed out there?

In other words, it’s getting harder and harder for investment managers to find good value opportunities in emerging markets as money flows into those economies.

I have an old friend who’s told many a story where the ending is, “If you have more than one girlfriend you really don’t have any.”  Not to make investing like relationships, but if you can’t find any distressed investments, then all investment options are distressed.  The bottom line is that everything is overpriced and nothing is safe.

America’s boomers are nearing retirement and they are flooding the system with money.  Lots and lots of money.  Professional investors are looking for places to put all this money and they’ve driven up the prices of everything to the point of absurdity.  Bolivian bonds under 5%.

There is so much money out there that it’s essentially free.  So we’re stretching the rubber-band putting more and more and more money into the system and simply doesn’t know what to do with more money.  Sooner or later something is going to have to give.  What’s happening is that the system is getting less and less stable; more people are taking greater risks simply because there is no other alternative.

I don’t believe it’s possible to predict (with any accuracy) exactly when a bubble will burst.  But we’re going to see a world-wide financial melt-down like nothing the world has ever seen before.  We’re going to see it soon.