David Roche – Bond Yields: Myth & Reality
Bond yields today are unsustainably low. It is easy to see why. The Fed’s inflationary use of the word “transitory” finishes by creating “truth” out of a myth and commercial banks have so much excess liquidity parked at the Fed that putting it into higher yielding bonds is a no brainer.
But this will all reverse. The causes will be the size of the US budget deficit that increases demand but not supply for Treasuries. And the longer term drivers of inflation: big government, big debts, central bank lack of independence, inequality and social income and national economic policies that reverse the disinflationary forces of globalisation.
When bond market bubbles burst, equities will follow suit because the discount factor for future profits will rise reducing their present value and profits will become more cyclical and unpredictable.
