By Liu-Yue (Louie) Lam, Co-Founder, CEO, Oxstone Capital Management,
Bond Market Commentary
The symptoms that led to the Great Recession (2007-2009) have not been resolved. Private sector debts were only transferred from the private balance sheet to the public balance sheet. The massive fiscal and monetary stimulus policies needed to combat the Great Recession as well as the collapse in the tax base have led to soaring budget deficits at the federal, state, and local levels. With high unemployment decimating the tax base, governments have continued to fund spending programs with increased borrowings.
These fiscal problems are also a global issue especially in the G-8 countries. This is leading to a ‘crowding out effect’ as the overhang of public debt competes vigorously with private sector debt. Higher future interest rates are a near certainty. Who is going to buy all that debt? In addition, excess liquidity driven by current low interest rates will eventually lead to inflation. Global competitive devaluations among G-8 countries and increasing sovereign default risks are creating a perfect storm where there is no longer a true safe haven in bonds. This all spells very bad news for the fixed income markets especially Munis and Treasuries, and even Corporate Bonds.
The traditional bond market has produced an annualized return of 6.1% over the past 84+years and 7.4% over the past 10 years. However, we believe the great bond bull market of the past 30 years to be over. With current interest rates at an all-time low, we expect interest rates to gradually move higher over the years due to the adverse scenario mentioned above. Are investors prepared for a long term secular bond bear market? In an environment where interest rates and sovereign risks are rising; bond valuations will most likely decline in addition to the heightened level of volatility in bond returns.big picture, bond market, bond market annual returns, budget deficits, crowding out effect, excess liquidity, fiscal and monetary stimulus, fixed income, food for thought, global competitive devaluations, great recession, inflation, interest rates, investment commentary, Liu-Yue (Louie) Lam, long term secular bond bear market, Oxstone Capital Management, Oxstone Investment Commentary, oxstones, oxstones investment club, public sector debts, sovereign default risks, tax base, unemployment