A Market Moved 1,110 Percent But You Shouldn't Care
Sometimes, a market move of 1,110 percent is meaningless. The law of small numbers explains why.
Here's what happened to the 10-year German government bond since the selloff in European debt kicked off on April 17:
From the April 17 record low of 0.049 percent, the yield has ascended steadily until it reached a high of 0.593 percent Wednesday. That gets you to the 1,110 percent figure.
As mesmerizing as a climb of more than one thousand percent seems, consider how stupendously low those yield numbers are in historical context. Germany's 10-year borrowing cost averaged 0.8 percent in the past year, 1.8 percent in the past five years, and more than 3.8 percent in the past decade. The relentless march toward zero, it would seem, is the aberration, not the rebound seen in the past three weeks:
Put another way, the price of the benchmark German bond dropped to as low as 99.12 Wednesday, down from 104.42 at its peak. Now, no investor relishes the prospect of losing five percentage points of value on something they own; but it's not exactly the kind of meltdown that should threaten your existence as a money manager. Sure, the global fixed-income community as a whole has lost about $430 billion in the past few weeks, according to my Bloomberg colleague Cecile Gutscher. But it also made an awful lot of money in the preceding six years.
The 1,110-euro question, of course, is what triggered the move. Among the suspects: Concern that Greece is on the brink of exiting the euro; investor expectations that the euro economy is showing sufficient signs of life to have killed off the threat of deflation; buying exhaustion after such a prolonged rally; or Wile E. Coyote finally looking down after a long run in suspended animation from the cliff's edge.
The problem with all of those is that they don't really capture the echoing rise in U.S. Treasury yields. While movements in the German market typically cause ripples for U.S. debt, changes in the European political or economic landscape shouldn't trigger the full-blown sell-off we've seen in Treasuries.
I'm going for something simpler. When Bill Gross, Jeffrey Gundlach and Warren Buffett all tell you in the space of a few weeks that there's a market they'd like to bet against, it's as if the universe is whispering in your ear that you might want to take at least a few chips off the table before the next spin of the wheel. I'd like to think most people are smart enough to pay attention to what the universe is saying.
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