Why bond investors around the world are a worried lot

MUMBAI: Something strange is happening in international bond markets. Bloomberg News on Tuesday reported two events – investors are paying to own German bunds rather than conventional wisdom that they have to be paid to part with funds. And Ghana, a sub-Saharan African nation, is likely to raise a billion dollars in Eurobonds. Both should worry investors.

One reflects an investor desire to protect his capital for a longer term as he is unsure of other returning his money. The other is the compulsion to generate returns that would feed them in future.

Almost $8 trillion of bonds if held to maturity will fetch the holder less than what he has paid. Average yields for 10-year notes in the US, Japan, Germany and the UK, which have issued more than $25 trillion in government debt, fell to 0.69% last week, which is the lowest on record and well below the 5% average over the course of 145 years, Bloomberg reports.

Record rally in any asset class for a long period should worry investors. Bonds have been on a tear since the central banks’ so called unconventional monetary policies of printing notes began after Lehman Brothers threatened credit markets. It will be foolish to believe that central banks would be able to prick the bubble they created without causing much damage to markets. This bond bubble is no different from stock, commodities, gold, real estate, art or for that matter even the Emu bubble which bruised thousands in Tamil Nadu. This is what the man who built the world’s biggest bond fund, Bill Gross, has to say about bond market: It is a “supernova that will explode one day.”

After all it may closer than ever.