Bond market stares into abyss, fears a bubble burst
London, July 14:
Bonds are meant to be safe, predictable and boring. Yet the earthquake in the debt markets, which has sent bond yields shooting up over the past month will be felt around the world, from Britain’s teetering housing market to the pockets of private equity barons. Cut-price borrowing has fuelled a multitude of booms; and as the price of debt rises, investors everywhere are vulnerable.
Back in the late 1980s, bond traders were the ‘big swinging dicks’ of Wall Street, immortalised in Michael Lewis’s memoir, Liar’s Poker, as boorish adrenaline junkies, trous-ering multi-million-dollar bonuses and inventing the cult of the ‘leveraged buyout’ — the debt-backed corporate take-over — simply to create fresh piles of debt for them to trade.
These days, hedge fund managers and private equity bosses, not fixed income traders, are the new masters of the universe; but the dramatic sell-off in the bond markets over the past few weeks could have more momentous consequences than even the boldest private equity coup. Falling bond prices mean rising yields, and that means higher borrowing costs for everyone. Analysts fear a whole bath of bubbles could be about to go pop. The jump in yields is the end of a long, long story.
During the aftermath of the dotcom crash five years or so ago, central banks around theworld slashed interest rates to cushion their economies against recession. They kept borrowing costs low for years, encouraging consumers and companies to pile up a mountain of cheap debt.
Since the global economy has recovered, and inflation has picked up, central banks have pushed up the short-term rates they can control. Yet the cost of longer-term borrowing, determined in the markets by how much investors are willing to pay for bonds, has stubbornly refused to rise. Former Federal Reserve chairman called this a ‘conundrum’.
What is a bond?
LONDON: It’s a ‘fixed
income’ financial product: the issuer — usually a government or a company borrowing money in the financial markets — promises to payout a certain sum each year. The more investors pay for a bond, the lower its yield: the percentage of its price the buyer receives annually in interest. — The Guardian