No-Bond World And The Risk Of A Daily Liquidity Crisis
Rates hit new lows this month. Symbolically, the 50-year swap rate in Europe dived into negative territory. Bonds as an asset class are in extinction, a major shift in modern finance as we know it, inadvertently turning 'balanced portfolios' into 'long-equity portfolios'. The 'nocebo effect' of enduring negative interest rates is such that negative rates are deflationary, hence self-defeating. Meanwhile, they have potent unintended consequences for systemic risk, which spreads around, leading the market into an historical trap. A 'Daily Liquidity Crisis' may result. All the while as markets get off the sugar rush of Trump rate cuts, and Europe has his banking sector at risk of implosion.

History Being Made

It must be a great thing to witness history being made during the span of your career, to find yourself in a market where so much happens for the first time in the history of finance, and close to everything else is at an extreme over the past decade. Nothing much is left around us which is trading regularly, or around historical averages.

In no particular order: the whole of the US interest rate curve dropped below 2% in mid-August, for the first time in history. The whole of the German interest rate curve dropped below zero. The Swiss, Swedish, Japanese curves are also negative for their entirety or whereabouts. The 10yr Swiss government bond yields a mind-blowing -1.2%, a sure bet to make no less than 12% in capital losses by maturity. Peripheral Europe joined in: the 10yr Portugal government bond is close to 0% yield now, about to dive in negative land too.