What Might Pop the Bond Bubble?
On last week’s episode of the “Behind the Markets” podcast, we spoke to Dave Donabedian, chief investment officer for CIBC Private Wealth Management, and Kevin Muir, market strategist for East West Investment Management. We had a timely discussion on market volatility and the outlook for global markets; with Muir, we particularly focused on what he calls today’s global bond market bubble.
Donabedian looks at valuations around the world, and despite the uncertainty over trade policy and a view that markets get worse before they get better, he has a favorable outlook for the U.S. over global markets and for emerging markets and Asia over developed markets. He sees an interest rate cut coming in September from the Federal Reserve (Fed) and indications from the Fed that more rate cuts will follow.
The discussion with Muir was especially interesting, as we’ve witnessed interest rates dropping to ever-lower negative yields across Europe and the rest of the world. He understands why people are flooding into U.S. Treasuries today on worries of a recession. When investors are guaranteed to lose money on a real and nominal basis by investing in German bunds, unless they can find someone else to sell those bunds to at an even greater negative yield, he finds it hard to describe this environment as anything but a bubble.
Muir has shared his thoughts on Twitter, and the conclusion of his 25-tweet thread summarized his thoughts as: We are on the cusp of a seismic shift in government attitudes toward fiscal spending that he believes will ultimately pop the bubble. To read more of his views on this topic, you can view the Twitter thread here.
Muir is not quite ready to short German bunds and get paid the negative interest rates, but he believes ultimately the short German bond trade will prove to be one of the great shorts of a lifetime.
Muir believes we have been wrong to rely only on monetary policy to stoke inflation but that as the governments step up with much greater fiscal spending, they ultimately will create the inflationary pressures that will move interest rates higher. That subject is a continuation of the modern monetary theory discussion we had last week with Samuel Rines and Danielle DiMartino Booth.
Please listen to our full conversation with Muir and Donabedian below.