How ‘Risk-Free’ Bonds Will Trigger Bloodletting in Bonds, Stocks, other Assets

Rarely do we investors get a market that we know is overvalued and that approaches such clearly defined limits as the bond market now. That is because there is a limit as to how negative bond yields can go. Their expected returns relative to their risks are especially bad. If interest rates rise just a little bit more than is discounted in the curve it will have a big negative effect on bonds and all asset prices, as they are all very sensitive to the discount rate used to calculate the present value of their future cash flows.
That is because with interest rates having declined, the effective durations of all assets have lengthened, so they are more price-sensitive. For example, it would only take a 100 basis point rise in Treasury bond yields to trigger the worst price decline in bonds since the 1981 bond market crash. And since those interest are embedded in the pricing of all investment assets, that would send them all much lower.
Those words are from the most successful hedge fund manager of all time – Ray Dalio. When he speaks, we listen.
There is now more than $13 trillion – that’s trillion with a ‘T’ – of global debt that offers investors a guaranteed loss if held to maturity. Investors are now partaking in what can only be described as the largest game of ‘Greater Fools’ in the economic history of man.

This post was published at Wolf Street by Alex M. ‘ November 2, 2016.