Prophet Of Doom

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What's going on?

The prices of US and European government bonds are tumbling, leading investors to wonder if this departure from safe havens is a sign of better times ahead or of impending doom.

What does this mean?

In an effort to support their economies during the coronavirus outbreak, governments across the world are planning to spend hundreds of billions in borrowed dollars to prop up struggling businesses and individuals. And that means theyll need to sell bonds.

Its partly investors’ expectations of the increased supply thats pushing the prices of US and European government bonds lower, in turn driving yields which move inversely to prices up from recent record lows. That much was clear from the yields of 10-year US bonds, which continued to rally on Tuesday after Mondays biggest jump since 1987. There were similar selloffs among Germany and Britains bonds too despite often being considered some of the safest investments around.

Why should I care?

For markets: The optimism test.
The selling of bonds is normally seen as an indication investors are predicting rosy times ahead. So its entirely possible the bond market is a glimpse past the impending recession and into the sharp rebound in economic demand well see once social distancing is a distant memory. Then again, its also possible the simultaneous drop in both bond and stock prices is a sign that investors looking to cash out are simply urging fund managers to sell everything

The bigger picture: Inflation nation.

Debt-fueled government spending should, in theory, lead to inflation, which is poison for bonds because it reduces the future value of their fixed payments. But investors have made that prediction and been proved wrong again and again since the massive bailouts following the 2008 financial crisis. Those who believe this time around will finally be different will probably be drawn to tangible investments like gold, copper, or real estate or else seek out inflation-protected bonds, whose interest payments rise if inflation rears its head.

Originally posted as part of the Finimize daily email.

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