The calm creeping back into global bond markets is borrowed time, and the next leg of the sell-off will be sharper, faster and more brutal than anything seen this month, warns the CEO of deVere Group, one of the world’s largest independent financial advisory organisations, as oil prices retreat from recent highs and yields pause for breath.
The comments from Nigel Green come as the benchmark 10-year US Treasury yield holds near 5.17%, a fraction below Thursday’s peak, its highest level since June 2007. The 30-year bond sits around 5.46% after touching levels last seen in 2004.
He says: “Markets are exhaling because oil’s come off the boil. Fine. But nothing that pushed yields to 19-year highs has gone away.
“The astronomical debt’s still there, the inflation’s still there, and central bankers are still talking tough.
“We’re in a pause, and pauses in bond markets tend to end violently.”
Brent crude has slipped back from close to $110 a barrel last week, easing the immediate inflation scare. Pain at the pump remains severe, with US regular gasoline averaging nearly $4.48 a gallon against $3.18 a year ago.
This week’s rout reached far beyond America. Japanese government bonds, UK gilts, German bunds and wider eurozone debt all saw yields jump to fresh highs before edging lower on Friday.
Nigel Green says: “When Japanese, British and German debt sell off in the same week as Treasuries, you’re watching a global repricing of what governments pay to borrow. Investors are demanding more to hold paper from states that keep spending as if money is free. They’ve every right to.”
Pressure is also coming from the Federal Reserve. Governor Michael Barr signalled on Wednesday that further tightening may be needed to drag inflation back to target, while business activity surveys hit their strongest reading in more than four years.
Futures markets now price roughly a 71% chance of an October rate hike.
The deVere CEO says: “A strong US economy, sticky energy costs and a Fed openly flagging more hikes make a toxic mix for bonds.
“A 71% probability sounds like a lot is already priced in. If the next inflation print surprises, the rest gets priced in overnight and long yields gap higher.”
Washington’s borrowing needs to sit at the heart of his warning. The Treasury’s buyback programme has helped steady parts of the market, but supply keeps coming.
Nigel Green says: “The buyback programme has bought some breathing room, and credit where it’s due. But you can’t buy back your way out of a supply problem.
“The US has to keep issuing enormous amounts of debt, and every auction is a test of appetite.
“Sooner or later one goes badly, and when it does, I expect the move won’t be measured in a few basis points.”
He believes the respite itself is sowing the seeds of a harsher reversal.
He says: “Here’s why the next wave will be worse.
“After a pullback like this, people get comfortable. They add risk and stretch duration, betting the worst is behind them.
“So, when the next shock lands, whether it’s oil spiking again, a hot inflation number, a sloppy auction, or an unfavourable Budget, there’s far more to unwind. Orderly turns disorderly very quickly.”
Oil remains the wildcard. Supply disruption in the Middle East has left crude swinging wildly, and a renewed spike would reignite every inflation fear the market has just shelved.
Nigel Green says: “Energy prices can reverse in a matter of days. Anyone assuming $100 oil is now in the rearview mirror is taking a big gamble with their bond exposure.”
The consequences stretch well beyond fixed income.
He concludes: “Enjoy the quiet while it lasts. The forces behind this sell-off are still building, and when they break loose again, I expect it’ll be more extreme than what we’ve just seen.”
