Bonds: the greatest bull market of all time gets even frothier

Many of us thought it would come to an end years ago but we’vee been humiliated by reality

A trader looks at screens at a bank in Lisbon . Photograph: Hugo Correia/Reuters

A trader looks at screens at a bank in Lisbon . Photograph: Hugo Correia/Reuters

Tue, May 13, 2014, 12:57

Bubble spotting is a favourite activity of market commentators. A real estate bubble is thought to be popping in China and another property bubble is forming in the UK. Equities, particularly in the US, are widely described as overvalued - some argue by up to 70 per cent, which must also count as another bubble. But the frothiest market of all, the biggest bubble, is that for bonds.

Global bond markets seem to go up every day. That’s the same thing as saying bond yields continue to fall, something they have been doing, on and off, since 1982. It has been one of the greatest bull markets of all time. Many of us thought it would come to an end years ago but, like all forecasters, we have been humiliated by reality.

Bonds are more important than any other financial asset. We obsess over the ECB policy rate, the euro and house prices. Bond yields are way more important than any of these, not least because, bonds actually shape these other asset prices.

Bond yields determine pretty much anything: from the price of agricultural land to the value of Apple shares, a bond yield is lurking somewhere in the background. Bonds will, to a considerable extent, drive how much tax we pay in the future; they will dwarf the significance of water or property taxes. The next time an expert talks about where Irish house prices are likely to go, notice that he will never mention the outlook for bonds. This is like forecasting the weather without reference to wind, sun or rain.

Bonds are not sexy. Yet fixed income traders make the most money. It has long been the case that there is more money to be made in bonds that equities. Bond traders have been earning big bonuses for far longer than ordinary bankers. Some investment banks have, curiously, been reporting lower profits in their bond divisions. Given the ongoing bull market it might be that their traders, like the analysts, have been betting, incorrectly so far, that bonds are due for a fall.

Yet, bond markets rarely figure very much in the popular financial media. We know who some bond holders are, of course, since Jean-Claude Trichet refused to allow us to immolate them. The ECB’s decision to protect European bankers from the mob lurking on Europe’s periphery was both unexplained and temporary. But we will be paying the financial price of this for centuries to come.

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