Key points from bearish bonds post in May 2016:
- Trump essentially says that he would grow the national debt - he's a developer and he loves low interest rates!
- It is very, very nonlinear, because once bonds lose momentum, who will want to own them? Professional asset management and retail investor sentiment are both all about momentum.
- Every credit - government or corporate - looks much worse with rising interest expense.
- We will come to realize that a lot of stuff in the economy (junk bonds, private equity) was part of a virtuous interest rate cycle.
- QE invariably caused rates to rise, and you could (and we did) make money buying bonds every time the Fed stopped buying them. The QE bond purchases may have been respectably large in relation to the flow of debt issuance, but they were puny in relation to the stock of $60T of dollar denominated debt. It freaked creditors out about inflation.
- The next crisis is going to come in the investment that is currently perceived as riskless enough for highly leveraged institutions like banks to buy. Right now, government bonds are accorded zero risk in calculating bank capital ratios. The idea that government bonds are riskless when governments are planning to flood the market and when the expenditures are consumed (building no collateral) may prove to be the latest extraordinary popular delusion.