Billionaire Bond King Says Rates Going Higher

Yesterday, billionaire bond investor Jeffrey Gundlach said he thinks the days of negative interest rates are numbered. He was referring to market rates on the benchmark ten-year government bond yields, specifically in Germany and Japan. If he’s right, that means the top is in for bonds.
The question is, will a decline in global bond markets (rise in yields) be orderly, or messy? The former will be good for stocks, as the incentives aren’t there for holding an asset (bonds) yielding little-to-nothing (or negative) with a declining value. Therefore, masses of money should rotate from bonds to stocks. If it’s messy, and rates rise too fast, it will shake the entire financial system, global markets, and the global
economy. But central banks are highly sensitive to a shock in the bond market and they’ve proven to be able to quell shock risks (i.e. the “messy” scenario).

Still, the interest rate market can move fast. Remember, last April, before the Bank of Japan cut its benchmark rate to below zero (negative), and before the European Central Bank cut its deposit rate further into negative territory, the German ten-year yield was trading at all time lows, flirting with the zero line. And that was sending a very confusing message to markets. But Gundlach and Bill Gross (formerly known as “bond king”), both said, back in April of last year, that this was the trade of the lifetime — arguing that the market was wrong on pricing a move to negative interest rates in Europe.
It turns out they were first right, but ultimately wrong.
The rates markets had a massive position squeeze which sent ten–year German bond yields from 5 basis points (near zero) to 106 basis points in less than two months — a 20x move. U.S. ten–year yields (the purple line in the chart below) moved from 1.72% to 2.49% almost in lock–step.


But as we know, the Bank of Japan came in earlier this year, reversed that position squeeze, when they shocked the world by cutting it’s benchmark rate below zero.

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That set off a massive slide back down in global government bond yields. The ten-year government bond yield in Japan collapsed, and sank as low as negative 32 basis points. That acted like an anchor on global market interest rates, sinking rates everywhere, including in the U.S., which was in stark contrast to the direction the Fed was moving. In July, about 15% of the value of global government bonds were yielding below zero.
But major market turning points tend to come with a catalyst. And that catalyst, many times through history, has been some sort of intervention. If the bottom is now indeed in for rates, what’s the catalyst?
Remember, the Bank of Japan, just last month announced they would peg the Japanese 10 year yield at zero. In the years ahead, when we look back, that announcement could be what turns out to put the floor under global government bond yields.

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source {forbes.com}