The beginning of the end of the debt bubble … and its consequences

It seems that Grump’s victory, coinciding in time with the start of rate hikes by the Good Finance, has finally given the kick-off of the debt bubble that we have lived in the last decade -And it is still paradoxical, since Grump has always been the king of debt with his real estate and business empire- However, said prick is only glimpsed where the economy seems to emerge from the hole of deflation and anemic growth , that is in the US

What happens is that when the Treasury sneezes, the long-term debt of Europe and Japan suffers pneumonia. And that, the unsuspecting fixed-income investors of recent years, should have had it very present.

Debt served in tray by the central banks


So we are already seeing how, portfolios of pure fixed income (bonds) that had promised them so happy with the infinite rally of debt served in tray by the central banks, begin to enter losses that surprise their suffered badly advised owners. And it is that the losses that are going to suffer are and will be directly proportional to the avidity of performance that they have sought, since the vast majority of advisors have preferred to increase terms of duration that reduce the level of qualification of the issuers.

That is to say, to achieve a rickety 2% yield, they have preferred to buy long-term bonds from issuers with an investment grade rating instead of digging into more solvent issuers at a lower term, although worse considered by risk rating agencies (yes, those same prostitutes who, obeying the voices of their political-financial masters, led us to collapse in 2007).

Buying durations of debt


The consequence of buying durations of debt at such an exorbitant price, now that this bubble begins to lose air, is none other than the devaluation in the quotation of said debt. It has reached such an extreme in that delirium buyer that the holder of bonds of the Belgian State with a maturity of 100 years (yes, yes, a century) is today losing a whopping -30%! And that with a black leg rating (AA) and only a sneeze from the US Treasury Bond, since the 10-year American bond is still only at 2.5% interest, and therefore still has a long way to go until normalize to levels of 4-5%.

A deadly trap where they exist, where the poor deceived investor will not live long enough to recover that ax in his estate. It should also be remembered that we are talking about fixed income (sic), that is, investments that are destined for such assets because their owners do not want / can / should suffer bulky losses without jeopardizing their physical and psychological well-being.

In addition, that deadly trap has become gigantic in the last 10 years, since it has doubled and reaches 45 billion (45 Tr) dollars! You can read this article by Sean Cole in which they talk about this disaster announced by few.

No one can say that we have not been warning of the risk of fixed income in recent years. Warnings to which, now yes, they begin to add many other advisors of the sector. SocGen: “The decade-long party in the debt markets is over (…) Prepare for a serious hangover.” S&P: “Grump’s unanticipated rise has let some of the air out of the bond market bubble.” Good Finance Bank: “It’s a” stampede “out of bond funds”, etc, etc … It goes without saying that the fall in bond prices will force many to sell their portfolios, sharpening the falls, which are not and more bleeding thanks to the fact that Brhagi and company continue to maintain a demand as astronomical as unreal.

The expectations of economic recovery that it entails for the Good Finance, fueling and accelerating economic growth and inflation forecasts. For example, salaries have clearly rebounded in the US labor market.

For all these reasons, the fall in debt prices around the world, dragged by the Treasury price, seems to have only just begun. And the worrying thing about this new scenario is how far the seams of hyper-indebted countries with public deficits (that is to say with increasing debt) such as Italy, Spain, Portugal, Greece will endure … before winter comes …

Traditional fixed income funds

Traditional fixed income funds

With this scenario, the trillion question is where to find income when the bond market punctures its bubble? There are, but of course far from the circuit of traditional fixed income funds, since you have to look for them through alternative strategies that commercial or private banks do not usually have in their sales catalogs. And of course, no one should confuse shares with dividends with fixed income, since we do not forget that the shares quoted in developed markets are also not cheap enough to assume that risk.

But let no one get depressed, since it would be a much worse scenario for everyone to abort the jab of the debt bubble. Because that would indicate the failure of the economic recovery and the pumping – already desperate – of central banks to postpone an inevitable collapse. In other words, we should pray that the debt bubble will hit reasonable levels even if it leads to significant losses to poor poor savers / investors.

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