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U S Bonds, Sovereign Debt, The Humpty-Dumpty Factor
Sovereign Bond Proliferation Makes Them Risky, Says UK
Professor …All the King's horses and all the King's men…
London's famous
Financial
Times helps pull the
plug on the central
bankers' dark secret,
that the proliferation
of sovereign bonds
has made them very
risky, clearly stated in
"The assets made
combustible when
regulators call them
safe", June 1,
2015. Professor
Avinash Persaud,
who writes frequently
for Financial Times,
tells us European and
UK bonds are already
going up
in smoke. He
postulates that "regulators" make sovereign debt appear precious by providing a false image of safety. And he
tells us sovereign bonds offer virtually no income, and "great risk". He all but states that the biggest bond
markets are doomed and explains why, supporting much of our own thesis as outlined in "US Debt, The
Godfather of Bubbles", published on April 26, 2015
Hats off to Professor Persaud, who does not use the terms, "bubble" or "scam" as this author does in referring
to US debt, but who hits to the quick of why "sovereign" bonds are grossly overvalued. Persaud refers to these
euphemistically as "exotic assets". The result of over-inflated trillions of dollars of bonds, paying interest
ranging from "very little to nothing at all," will be devastating. Avinash Persaud is a non-resident, senior
fellow at the Peterson Institute and Emeritus Professor of Gresham College in the UK. He writes primarily
about Euro debts, but includes US and UK bonds, stating:
"Exotic assets, and the crippling losses that big and indispensable financial institutions suffered after buying
too many of them, bore much of the blame for the last financial crisis. The next one might have a more
paradoxical cause. Instead of being overexposed to assets of dubious provenance, many of the same
institutions may be buying too many of the assets that the authorities deem safe."
Professor Persaud continues, "Regulators are forcing the holders of $100tn (yes, that is 100 trillion dollars)
worth of assets the world over to buy debt from the most creditworthy issuers: companies and sovereigns with
pristine credit histories, which comfortably generate enough cash to cover their obligations."
The result is "…corralling a huge amount of capital into a narrow band of the market drives prices to perilous
highs. Even if these assets were safe to start with, the enforced concentration is enough to make them risky."
He explains how the once ultra-safe has become the most overpriced asset on the planet because central banks
have competed with investors to buy "sovereign" bonds with printed money, bidding up the price (thus driving
interest rates down) to levels where the bonds lose thier semblance of value because they pay little or nothing.
Dr. Persaud goes on to state, "central banks in Britain, the US, Japan and now the eurozone have all
conducted programmes of quantitative easing, intervening in markets to buy assets using freshly minted cash.
In each case, they have favoured sovereign bonds. At the same time as regulated companies are being forced
to buy these “safe” assets, then monetary authorities have been taking away large swaths of supply."
Our own "Godfather of Bubbles" reaches a bit further in explaining how and why the US Federal Reserve
Bank of New York has purposely bid up the price of yesterday's US debt issue, not because it covets US debt,
but because it has needed to create the specter of escalating bond value. Otherwise the trillion-dollar victims
would have fled the US debt market years ago. Specifically, we wrote, the Federal Reserve System (FED)
creates the illusion of capital gains on past issues already held by institutional investors. Thus, these
"regulators", as Professor Persaud calls them, have created an artificial bull market that has taken 32 years to
reach its present bubble stage. Many institutional buyers have continued to accumulate US debt, not for safe
income but for a capital gain that make no economic sense, that is simply the result of manipulation made
possible because central bankers can print the money they spend in the bond market. Dr. Persaud confirms
this, and tells us that bond investors are already experiencing big losses. He arrives at this most scholarly
conclusion:
"The result is unprecedented: in the world's bond markets, almost €5tn ( five trillion Euros) of assets currently
trade at prices so high that the yields on them are negative, according to data from Thomson Reuters. Among
them are government bonds issued by Germany, the Netherlands, Switzerland, Austria, Sweden and Denmark,
as well as some corporate bonds, such as those issued by BP and Nestlé. Longer-dated bonds issued by
European governments also attract low yields; as low as 0.077 per cent, in the case of 10-year bonds issued by
the German government."
He asserts, "These
assets are now so
overvalued that they
have little chance of
rising further. What
they do have is a lot
of downside, and a
lot of jittery holders.
Speculators feed off
such asymmetries.
That may be why, in
just 17 trading days
between 20 April and
13 May, low-yielding
bonds lost $0.5tn
($500 billion) of their
value. There was a
similarly sharp selloff last December;
then the focus was US
government bonds.
These are tremors before the quake. Yet systemically important institutions are being forced to linger on the
faultline."
This author adds that many sovereign bonds issued by third world countries have collapsed. But perhaps
never, to our knowledge, have the central banks of the world's three major currencies, the Dollar, Euro, and
Pound Sterling, all simultaneously destroyed the value of their own bond markets. Professor Persaud calls the
violent shaking in the bond markets, "the tremors before the quake." I ask. if a half-trillion dollar loss is a
"tremor", what will the "quake" feel like?
Are there any pieces of Humpty-Dumpty big enough to pick up? It is interesting that Brit James William
Elliott wrote his meaningful nursery rhyme in about 1887, scant years before England's two financially
disastrous foreign invasions broke the financial back of the Empire. Borrowing led to the destruction of the
Pound Sterling as the world reserve currency 46 years later. (See US Debt, The Godfather of Bubbles)
Next issue, who should we blame?
Charles E. Carlson
Notes:
Professor Persaud' full story, The Assets made combustible when regulators call them safe, can be read on
FT.com, a subscription publications, or hIs blog.
US Debt, The Godfather of Bubbles, can be read at www.whtt.org
We Hold These Truths: http://whtt.org/
Post date: 2015-06-05 17:37:44
Post date GMT: 2015-06-05 17:37:44
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