I have posted a number of articles of Yves Lamoureux, President at Lamoureux & Co.. In Oct 2009, he predicted the 30 yr would fall to 2.5% when most pundits - including the then-inestimable Bill Gross -expected a rise to 5%. Yves was right, and I christened him the New Bond Guru. On Friday he published his new prediction, that the Great Bond Bull Market from 1982 is now over. Summary:
Bonds have tended to act as expected as risk preference shifted. However, bonds now have neither a credit risk premium and nor an inflation risk premium. Our proprietary model is clear: treasury paper of 30 years has the correct valuation of 3.50% and above. That is the level we would feel confident as buyers.
He makes an intriguing additonal observation, of a type of hyperinflation, but not the type that is commonly bantered about, a Wiemar-Republic style inflationary collapse. Instead, as we risk more of a deflationary environment from too much debt (deflation arising as that debt gets written off or washed out faster than central banks can print), this time it will emerge from increased credit risk in what heretofeore have been the most risk free instruments - US Treasuries.
The harbinger of this may be Japan, which (as John Mauldin has put it) is a "bug seeking a windshield." The expected new Prime Minister wants to go to extremes of monetization to reinflate their moribund economy. As money has bailed out of Europe, it has found Japan, and the Yen has risen. Now it is being purposely weakened, and has hit a seven month low with the USD.
Investors have been selling the yen since Japan's prime minister announced last week that an election will be held Dec. 16. Polls show Shinzo Abe, leader of the opposition Liberal Democratic Party, as the leading candidate to emerge as prime minister. Mr. Abe has been calling on the Bank of Japan to enforce bolder policies, including unlimited printing of money and setting reserve interest rates at zero, or even in negative territory to stimulate lending.
The MMT view has circulated in financial circles, with the core belief that a currency issuer never need to default. This of course flouts history, where fiat currency after fiat currency has gone down in the sort of credit collapse envisioned by Yves. While it seems almost unimaginable that the USD might suffer such a fate - and it is years away from such a crisis - the Yen may become the first major currency to test the MMT approach of extreme monetization.
Financial observers spend undue attention on stock markets. Bond markets are an order of magnitude bigger. It is now time to watch the bond market.