Cart Before Horse

Cart Before Horse
Don't look a yield-horse in the mouth (Photograph by Danish Khan)
Photograph by Danish Khan

The declining yields have created a potential for a “bond bubble” that could result in significant losses for debt investors, Fitch Ratings said in a Dec. 19 statement. Oaktree Capital Group LLC’s Howard Marks said in a Jan. 7 memo to clients that the “scramble for return has brought elements of pre-crisis behavior very much back to life.”

“At some point, interest rates will go higher again, and all of the money that has piled into fixed income over the past three years, some of it will come out,” Goldman Sachs Group, Inc., president, Gary Cohn said. “We will clearly be there to facilitate, we will clearly be there to provide balance sheet and liquidity to our clients, but ultimately, we can’t be the buyer of last resort.”

—Christine Harper & Michael J. Moore: “Credit Bubble Seen in Davos as Cohn Warns of Repricing,” Bloomberg News, Jan. 24, 2013

“… in significant losses for debt investors. …”

Bubbles, of various shades and size, are oh-so in. The “Credit Bubble” is front and center. Harper and Moore’s quote-laden effort captured a Davos moment. That moment is worldwide.

Time will tell the “when” of all this. Time will also tell the “size” of the deflation of this historic bond bubble.

What time won’t tell is when all will wake up to the sequential GPS of the horse and the cart in this anticipated denouement.

One wheeled point of rest is the widely anticipated shift from bonds to equities propelling the Dow to say, 16,000—just to pick a number. The other four-legged spot is a bit less recognized.

That is, before the grand shift can occur there are levels of pain, as debt instruments decline in price and increase in yield.

Yes, I should chat up the follow-on outcome of rising stocks. But this presumed Bond Bubble has an unspoken prior condition.

Most will exit bonds years-of-coupon lighter.

This January the cart is before the horse. Discuss.

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