German Bunds are the short of a lifetime, according to Bill Gross, the bond guru.
He seems to have called the very low on April 21 (red circle) of the 10yr Bunds as seen here in the daily yield chart. Did he? Or did he rather influence the market with his opinion?
In any case, interest rates in Germany and other European countries are ridiculously low.
- Europe has severe problems with its Euro. This sacred cow is the reason why some southern countries will keep on making deficits and building up their debt.
- The European central bank mimics their US counterpart with their QE and other policies of loose money. Inflation has to follow sooner or later.
The financial crisis in Europe has not been solved, nor is it only still there. No, it is growing, day by day. And European governments hope to pay back their debt by its devaluation.
Conclusion: The Euro is going to have tough times and some shiny day the bond market will wake up. The rescue of the Euro may be the fact that the US and Japan are not doing much better with their exploding debt and experimental money policies. But the bond market has no such safety net…
Bond holders have bought bonds for ultra-low interest rates and have received “paper” that is no safe bet, despite what they have hoped for. We see here an aberration in the market that desperately searches for safe investments. German and US debt seem to be the only escape in that race for safety.
What happens in such a situation? Essentially the market blinds itself!
You think these securities are safe, you buy them, the price goes up and the yield goes down. Tada, you were right, it is a safe investment, because low yields indicate low risks. You buy more and everyone else does the same. Others are doing it also? You simply must have been right…
Somewhere in the future bond holders will realize the harsh reality. Either their investment will be devalued the hard way with a hair cut, or it will be diminished softly, by inflation. And they got only tiny or even negative interest rates for taking such a risk…
On the day the bond market wakes up the real crash will start.