WHATEVER happened to the power of the bond markets? Bond traders were supposed to act as “vigilantes”, keeping spendthrift governments in check. But despite high levels of government debt, they have not been selling bonds, pushing yields higher. In fact, the cost of government borrowing is as low, or lower, than it has ever been. In many countries, investors have driven the price of government bonds so high that they are, in effect, paying for the privilege of lending to the government. Around $10 trillion-worth of bonds now have negative yields.

Bill Gross, a veteran bond manager at Janus Capital, warned recently that negative yields were a “supernova” that would explode at some point. He is not the first to argue that bonds have become ridiculously overvalued. Pessimists have been calling the top of the bond market since 2011.

In January almost two-thirds of global fund managers were gloomy about the outlook for government bonds. So far, however, this year has been another disappointment for the bears. Since the start of 2016, ten-year Treasury yields have dropped from 2.27% to 1.59%, British gilt yields of the...Continue reading