FT.com / Investor's notebook - Why sovereign bond yields will explode: [C]urrent bond yields and the increasing insolvency of our rulers are the biggest disconnect in financial markets today. This comes from two factors: quantitative easing by central banks and the collapse of credit demand by the private sector. Neither are permanent features of the economic landscape....
The Japanese “miracle” of the 1990s cannot be repeated in the US, the UK or even in Japan this time. The US and the UK will still have very low domestic savings rates with government debt heading towards 100 per cent of GDP.... [B]oth the US and the UK are heavily dependent on foreigners for financing that debt. So Treasury and gilt yields will rise sharply and the dollar and the pound will slide....
As the US, UK and Japan will be trying to borrow the same buck in international markets, bond yields will rise when QE stops and there is an even modest recovery in credit demand from the private sector. That alone is enough to prevent the development of a new credit bubble similar to those that have been economic drivers for nearly two decades. All credit bubbles rely on underpriced capital being in oversupply relative to the fundamental needs of an economy. Given the huge demand for capital by increasingly insolvent governments, those conditions won’t exist.
When will the bond bubble burst?... [Q]uantitative easing programmes will have to end sooner or later; and eventually the private sector will start to borrow again. Then yields on government debt will start to rise, back towards at least the average level of the 1990s and perhaps even higher as inflation expectations gain hold. That will end today’s bubble in bond markets and very probably in equity markets too, as these feed on the same source of liquidity and are priced off bond markets by the addition of a risk premium.... The danger for the real economy is not that the return to a normalised monetary policy takes place but that it does so too late. Too late would mean that the fall in asset prices has to be so large that it skittles economic recovery.
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