The bond market’s impending doom has been predicted so many times in recent years that it's hard to keep track, from the start of the Fed’s interest rate increases in 2015 to the central bank finally beginning to shrink its balance sheet assets toward the end of 2017.
And yet, while bond returns have been subdued and yields on average across all maturities are the highest since the start of 2014, it's been nothing even remotely close to the apocalypse-like scenario outlined by the mega-bears.
That brings us to Monday, the first trading day after Sept. 15, a date that many said would likely mark the final nail in the demand coffin for long-term bonds because of pending tax law changes.
More specifically, companies with an unfunded defined-benefit pension liability could take a tax deduction at the old 35% corporate tax rate if they funded it before Sept. 15. After that date, the deduction rate fell to 21%. But instead of falling out of bed on a sudden lack of demand from pensions, 10- and 30-year Treasurys barely budged and yields held steady.
One of the things that the bond bears tend to discount is the tremendous amount of money created by central banks since the financial crisis that is searching for a home. The collective balance sheet assets of the Fed, European Central Bank, Bank of Japan and Bank of England stand at 37% of their countries’ total GDP, up from less than 10% in 2007, according to data compiled by Bloomberg.
Another factor the bond market has going for it is that more investors seem to be worried about relatively high stock market values and the possibility of a looming equity sell-off. That should make fixed-income assets more attractive.
JPMorgan Chase strategists noted in July that less than half the global tradeable bond universe is held by non-bank investors, the lowest share ever, which should provide support as those investors rebalance their portfolios. Goldman Sachs strategists wrote in a report Monday that they expect state and local defined-benefit plans will continue buying Treasurys. "Some rough calculations suggest the above factors could lead to buying totaling about $400 (billion) over the next (five) years, and would likely outweigh any marginal decline in tax-related buying," they wrote.
As for the dollar, it has become fashionable to blame the struggles in emerging markets on a strong U.S. currency, except it hasn't really gotten any stronger. Yes, the Bloomberg Dollar Spot Index had a moment between mid-April and late June, rising about 6.5%. But since then it's done nothing, falling over the past one, two and three months. "Despite rising expectations about the pace of U.S. rate hikes in 2019 and continued concerns about the impact of a trade war as well as ongoing volatility in a range of emerging markets, it's nevertheless noticeable that the (dollar) has underperformed over the past month against a surprisingly wide range of currencies," BNY Mellon chief currency strategist Simon Derrick wrote in a report Monday.
Perhaps the greenback's struggles are just a reflection of the U.S.'s deteriorating fiscal position. The U.S. budget deficit widened to $898 billion in the 11 months through August, exceeding the Congressional Budget Office’s forecast for the first full fiscal year under the Trump presidency and up from $666 billion in all of fiscal 2017.
"A budget deficit that's heading toward ($1 trillion) at a rapid pace while the economy's growing above potential is going to scare the FX market when the slowdown hits, as it surely will," Kit Juckes, a global strategist at Societe Generale, wrote in a Friday report. "The dollar's going up by the stairs and risks coming down by the elevator, starting sometime in 2019."
