This Red Alert Is Now Flashing on the Bond Trader’s Radar Screen.

In News by redsocks

Liz McCormick

At H&G we only deliver Bonds which are attached to Land Developments / are Asset-Backed & have no underlying financial instruments attached to them. We start at 12% ROI. We advise all of our clients to steer clear of all the City Stock Market Bonds at the moment, which may just blink out.

For a very well written warning on the City, Bonds problem carry on reading. This is a very well written piece. Well done Liz.

Warning signs.

A bond-market warning light that glowed green for years is suddenly flashing red. The bad news for bondholders is that the last time this happened, it was accompanied by the biggest sell-off since the aftermath of the global financial crisis.

That indicator is the term premium, which, for both Treasuries and German bunds, has snapped back from last quarter’s record lows. The U.S. gauge is now on track for the biggest three-month increase since late 2016.

After a stellar rally through August, global bonds have pulled back in recent weeks as thawing trade tensions lightened the global economic gloom, sapping demand for the safety of sovereign debt. Rebounding term premiums now signal the sell-off has further to run — the measure of extra compensation for holding longer-term debt versus simply rolling over short-tenor security for years is in an uptrend that investors and strategists say has only just begun.

The 10-year Treasury yield, a benchmark for world markets, climbed Thursday to a three-month high as investors’ animal spirits were sparked by the ebbing of the biggest headwind to global growth — the U.S.-China trade war. That came as its German counterpart surged to levels unseen since mid-July and those in France and Belgium climbed back above 0%. The Japanese equivalent jumped Friday to its highest since May.

The investor is increasingly worried about holding longer-term debt as easing economic anxiety raises the prospect of a capital flight out of haven assets into riskier ones. Such a trend is already driving up yields, which, combined with the Federal Reserve’s signal that it will hold interest rates steady for the time being, is boosting term premiums. In Europe, a still-accommodative policy is bolstering inflation prospects, adding to the upward pressure on the gauge.

“Term premium was extremely depressed due to trade uncertainty, Brexit and you name it,” said Roberto Perli, a partner at Cornerstone Macro LLC. “These risks have abated so there is room for about a 50 basis point move higher in the term premium. And given the Federal Reserve is on hold — with no chance of lifting rates – there’s a lot of incentive for investors to take a risk.”

What’s a ‘Term Premium,’ and Where Did Mine Go?: QuickTake Q&A

Ten-year Treasury term premium has climbed about 42 basis points since the end of August, on track for the biggest three-month increase since 2016, according to the widely followed New York Fed ACM model created by Tobias Adrian, Richard Crump and Emanuel Moench. It rebounded this week to as little as minus 0.84% — from a record low of minus 1.29% in August, the least for NY Fed data provided back through 1961.

Understanding the trend in term premium isn’t just an academic exercise for bond wonks as it also helps gauge what’s driving debt yields and valuations. That margin of safety is one of three components that make up the yield of any given bond, according to former Fed Chairman Ben S. Bernanke — the other two being market expectations for monetary policy and inflation. Basically, it’s an extra cushion against risk over the security’s relatively long lifetime.