Global government bond markets are stuck in what BofA Securities strategists call their worst ever bear market — which, in turn, threatens the ease with which investors can exit the world’s busiest exchanges if necessary.
Those trades include long positions in the dollar, U.S. technology companies and private equity, said strategists Michael Hartnett, Elias Gallo and Myung-Ji Jung. Bonds are generally considered one of the most liquid asset classes available to investors; Other analysts say once liquidity dries up, that spells bad news for all types of investments.
Financial markets were not priced in on the worst possible outcome for inflation, interest rates and economies around the world, although global equities fell on Friday with bond selling in the US and UK. Dow Industrial DJIA,
Falling into bear market territory, the S&P 500 SPX lost more than 700 points;
It threatened to pull out the June closing low.
American products traded heavily for many years. Meanwhile, government bond yields in the United Kingdom, Germany and France rose at their fastest clip since the 1990s, according to BofA Securities.
“Inflation/rates/recession shocks are not over” and the bond crash in recent weeks “has led to a sharp increase in credit spreads, lows in stocks have yet to set in,” BofA strategists wrote in a note released Thursday. In the year He said investor sentiment was “undoubtedly” the worst since the 2007-2009 global financial crisis. The strategists also target the federal funds rate, Treasury yields and the US unemployment rate to 4% and 5% in the coming months and quarters.
Government bonds have posted losses of 20% this year, as of Thursday — the worst losses since 1920, according to BofA. Signed in 1919 and International government bonds are on track for one of their worst performances since the Treaty of Versailles, which took effect in 1920 and established peace terms at the end of World War I. Bond prices move in opposite directions, so rising yields reflect the sinking value of government debt.
It is a liquidity issue as it ensures that assets can be bought or sold without significantly affecting the value of the security. Without liquidity, it is difficult to convert assets into cash without losing money relative to market value.
Government bonds are the world’s most liquid asset, says Ben Emon, managing director of global macro strategy at Medley Global Advisors in New York.
“Rising yields are going to dry up credit and seriously hurt the world economy,” Emmons said by phone on Friday. “There is a risk of a March 2020-like ‘sell all market’ as people exit the market amid high volatility and realize they can’t really trade.”
A historic bond sell-off in the UK on Friday, fueled by eroding investor confidence triggered by the government’s mini-budget plan, only fueled fears of a meltdown, particularly in the traditionally safe-haven treasury market.
Read: The next financial crisis may already be brewing — but it may not be where investors expect it to be.
In the US, Federal Reserve officials have shown a willingness to crack down on high rates — whether in financial markets or the economy — to bring down the hottest inflation in 40 years.
Part of this month’s retreat in global bond prices is a “real fear that the central bank will step up in the race to maintain currency stability and not be the last country to hold inflation,” CEO Jim Vogel said. President of FHN Financial in Memphis.