Bill Blain: "The Market Mood Is Definitely Changed"

Submitted by Bill Blain of Mint Partners

What Bond Market Crisis? What are the consequences across Credit and other Asset Classes

“But what a fool believes no wise man has the power to reason away.….”

It’s going to be a short comment this morning due to doing some media-commentary stuff earlier. Yesterday wasn’t quite the end-of-the world Bond Market Meltdown the headlines predicted. US 10-yr rates breaching 2.5% did not cause the entire bond market to vanish in a puff of logic as the realisation yields are set to rise set in. In fact, y’day’s US Treasury auction went rather well. The hollow threat of China selling its Treasuries was replaced by the sober realisation there isn’t really much else they can invest in – even the Chinese later said it was “fake news”.

As bond market gurus like Gross and Grundlach weighed in with negativity, I was expecting to be writing a note about market’s over-reacting to bad news – thus throwing up opportunities. Instead it’s possible markets have under-reacted. This morning comments abound with chatter about how nothing has really changed; the search for yield and value continues, and we’ve had folk bottom-fishing and looking for cheap offers. No one was apparently tempted or panicked into being a forced seller yesterday.

However, the market mood is definitely changed. We know there is a very serious debate being held across fixed income departments in the investment community: just how much and how quickly will the dramatic spread compression of the last few years be undone by the end of the bond bull market?

What are the consequences for investment books, how to hedge it, and how to play it. Hedge funds and credit are all playing curve games and looking for the next trade. I suggest they keep a very close eye on Linkers and other inflation plays as well.

Much money has been made investing across the tightening credit spectrum these past few years. It feels that party has come to an end. The mood was summed up by a conversation I had with one investor y’day as I tried to sell him a large block of peripheral European covered bonds: “Bill, even by your standards this is cheeky: you want me to buy a big block of bonds someone else wants to sell so they can realise massive profits… and you want me to do this on the very day the bond market turns decisively bearish?”

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