Is the Debt Time-bomb about to go off?

With a growing amount of sovereign (and other) debt in negative yield territory, risks of holding long-term debt are magnifying.  In normal times, the world of bonds was called “fixed income”.  Investors would receive regular coupon payments until the bond expired.

But now with negative income – indeed a guaranteed loss – we shall have to rename it “fixed expenditure” or some such.

Many believe the culprit for this abnormal situation is the central bank oligopoly which has driven policy day rates into negativeland in the desperate hope that it would force commercial banks to lend, lend, lend to an already over-borrowed public (and commerce).

And this pushing on a string is being carried to extremes with few takers for additional debt at any price.  Central banks are at least verifying the old proverb that you can lead a horse to water, etc.

But this is not the whole story.  Very low term interest rates across the spectrum is a stark reminder that we are in a deflationary world.  Commodity prices have plunged (but are in a strong counter-trend rally), wage/salary growth is muted at best and retail prices remain flat.

Meanwhile, personal and sovereign debt levels are off the charts -and still climbing.

But investors/gamblers are still piling into bonds – partly because they see no real alternative, negative yield or not.  Central banks still engaging in QE (BOJ and ECB) are crowding out all others, even though they have cleaned up by front-running them.  Apparently, the game now for hedge funds is to guess which corporate bond is on the To Buy list and get in ahead.

A good roundup is found here.

Incredibly, the price-insensitive BOJ now owns around 50% of all equity ETFs and a huge chunk of individual equities in the Nikkei 225 – and the national debt is running around 450% of GDP with negative yielding bonds.  If a visitor from Mars saw that, he would conclude the Earth was a madhouse and he had better scarper back home pronto.  “Intelligent life on Earth?  Not there, Mum”.

So what will they announce on Thursday?  Helicopter  money is being suggested by some. Come on, Japan is a rapidly ageing society with little room for GDP growth for the foreseeable future.  Elderly people are not big spenders. But BOJ must save face above all (an oriental given) – and they will never contemplate reversing or abandoning their financial machinations.  They will keep on going until the batteries have run dry.

But how high can debt/GDP go until the penny drops?  That is the question facing all bubble-watchers.

But what’s this?  Is this a budding rise in US long-term rates?  Here is the 30-yr T-Bond yield weekly chart:

Note that the 2.28% low yield was made over a year ago and the market has been edging up since. The form of the advance is either an A-B-C or the start of a five up.

The least bullish case is the A-B-C where we have started wave C up which should extend above the A wave high around 3.3% (currently 2.75%). We should be at the start of a third wave up off the Feb low.

The most bullish case is that we are at the start of a strong wave 3 of 3 with yields rocketing (prices collapsing).  Note MACD is about to cross with bullish implications.  This promises to get much more interesting.

VIP Traders Club members are currently short 30-yr T-Bonds.