We’ve been among the crowd pointing to the bond sell-off as a potential sign of something bigger. David Kotok of Cumberland Advisors is also among that crowd. But whereas our concern has been the bond vigilantes lashing out against Washington profligacy, his main point is that the rise in bond yields isn’t solely a U.S. happening.
It isn’t necessarily being driven by inflation either, he notes. But what is sure is that investors are moving out of sovereign debt and exhibiting a herd mentality and going into stocks and commodities. I’m not sure exactly where that puts us; seems stocks and commodities were having something of a run before the recent bond sell-off. Still, the idea the there’s a global move out of bonds is important.
Via The Big Picture:
First and foremost, let’s be clear. This bond market riot is a global phenomenon. US-centric observers are blaming the rise of the benchmark ten-year Treasury note yield on an inflation-risk scare or on Fed money printing with QE2 (quantitative easing round 2) or on expanded deficits because of the tax-cut extensions. These observers are missing the boat.
This is global. Look at this chart (http://www.cumber.com/content/special/G4.pdf) on Cumberland’s website in the Special Reports section. The title is “Charts for Bond Herd Commentary.” In chart one we have rebased the yields of the four key global currency benchmark ten-year notes. We start at the low yield day of October 12. Since then the upward movement in yields has been correlated worldwide. We pick the four big denominations of debt, the yen, pound, dollar, and euro. Together they define the overwhelming majority of world capital markets.
This correlated movement suggests that the selling is coming from a reallocation of assets in large indexed global funds. They are moving monies out of the highest-grade sovereign debt bonds and into other sectors. We have now confirmed this with several large portfolios. We infer from our anecdotal evidence that there are many others doing the same thing. Their reasons for acting may be different but their actions constitute a herd mentality in this sector of high-grade sovereign debt.