Bond Bear Market (w/ Jawad Mian) | Interview | Real Vision™

TL;DR

With the Fed's quantitative tightening and an increased reliance on the bond market, the next five years may see a significant supply-demand disruption in bonds, leading to market turmoil.

Transcript

we are operating under the assumption that a bear market in bonds has begun. So that's how we think about it going forward. Imagine the next five years and how strikingly different they are from the last five years. So next five years-- because of quantitative tightening and the Fed's latitude to unwind they are going to unleash $1 trillion of supp... Read More

Key Insights

• 🪡 The next five years may experience a supply-demand disruption in the bond market due to quantitative tightening and the need to fund the US budget deficit.
• 🏦 Central banks are reducing their purchases of US treasuries, while concerns about the US debt and concentration of ownership limit foreign ownership.
• 🥺 Bonds may become a source of financial market volatility in the next crisis, leading to a sell-off in both bonds and stocks.
• 😀 Portfolio diversification strategies, such as risk parity, may be ineffective in the face of market turmoil caused by bond market volatility.

Questions & Answers

Q: What is driving the expected supply-demand disruption in bonds in the next five years?

The Federal Reserve's quantitative tightening and the need for the private sector to purchase maturing debt from the Fed's balance sheet, as well as funding the US budget deficit, are the main drivers of the expected disruption.

Q: Why are central banks stepping back from purchasing US treasuries?

Central banks have been selling US treasuries for the past two years, and concerns about the US debt and President Trump's statements about restructuring or defaulting have diminished confidence in owning US treasuries.

Q: How has the focus of investors shifted from the Fed's balance sheet to the US budget deficit?

Previously, investors were primarily concerned with the size of the Fed's balance sheet, but as the US government becomes more reliant on the bond market, investors are now focusing on the size of the US budget deficit.

Q: What are the potential implications for portfolio diversification strategies in the next financial crisis?

If bonds become a source of financial market volatility during the next crisis, traditional portfolio diversification strategies, such as risk parity, may not function effectively as both bonds and stocks would sell off.

Summary & Key Takeaways

• Over the next five years, $1 trillion of debt that is maturing off the Fed's balance sheet needs to be purchased by the private sector, in addition to funding the US budget deficit.

• Central banks are stepping back from purchasing US treasuries, and foreign ownership is not likely to increase due to concerns about the US debt and the concentration of ownership.

• The next financial crisis may see bonds as a source of market volatility, causing a sell-off in both bonds and stocks, leading to the ineffectiveness of portfolio diversification strategies.