Bond Markets: As Relaxed As A Bank of England Governor?

It would appear that the past few weeks have taught us many things in the worlds of politics and finance. One of the these is that the “chillax” approach to Government employed by David Cameron was enough to not only keep him in power, but actually to increase the margin of victory. Indeed, it seems that this approach was wielded successfully by others in the administration such as “independent” Bank of England Governor Mark Carney. Not only did interest rates remain unchanged for the whole of his tenure as central bank chief, he managed to notch up a very respectable 3 and a half hours London Marathon time. This is quite an achievement for anyone, let alone a 50 year old, who has the mantel of one of the world’s major economies to guide. As anyone who runs even modest distances will know, to achieve such a time does require considerable training. In contrast, manning a housing bubble and deflationary economy seems to be something which essentially can be left on the back burner for an extended period. This is clearly a lesson for would be successors to Mr Carney to note, whatever level of fitness they wish to achieve.

In fact, I was interested to note a headline in The Independent this week where it stated that Mark Carney is relaxed about the massive sell off in the global bond markets. At first glance this seemed to be a rather obvious observation as our friend is clearly someone who is in a state of Zen towards not only his current employment – paying nearly £1m a year – but also most other aspects of existence. But this report was of interest as being “complacent” regarding the present turmoil in the fixed income markets, and is an attitude that I at least partially share.

This is because bonds traditionally have a key part of the perspective of many a financial commentator. Just as it is “smart” for the leading representatives of big City institutions to be crying doom and gloom regarding the stock market, they tend to be fixated by the influence of the bond markets in general and bond yields in particular. Hence we get hit by references to “inverted” yield curves and other near mystical phenomena which are supposed to be of great significance, but are generally not. True, it could very well be that the latest crisis is the one that breaks the back of the financial markets and gets us to where we were back in 2007-8. However, the most likely scenario is that we are looking at one of the many storms in teacups that there have been since then. A good analogy would be the so called “taper tantrum” in the stock market as former Fed Chief Ben Bernanke tried to ease the markets gently into the idea that interest rates were to be raised. He soon did a U-turn as stocks tumbled, and current Chair Janet Yellen has had to more or less run with this ball ever since.

As for the bond markets, they may have lost over £250bn of value over the past few weeks, but such a correction was long coming. It is also to be expected as this market is no longer the haven of liquidity it used to be even relative recently. Therefore movements are rather more exaggerated, and will probably continue to be as the game of bluff over interest rates in the U.S. continues, and expectations regarding inflation/deflation continue to be so confused amongst traders and investors.