Many years ago, U.S. Barron’s had dethroned well-known fund manager Bill Gross from his throne «King of Bonds»The American administrator was for many years, perhaps decades, one of the most central forms in the bond sector, identified to a certain extent with the boom of the industry that began when Paul Volcker dissolved inflation in the 1970s. Being a co-founder of Pimco, Gross knew very well everything in the American and international bond market and every word of his could affect her in the blink of an eye. His successor, according to the American magazine, was Jeff Goodlach, head of DoubleLine Capital.
This option was quite reasonable as Goodlah also had very significant successes in the investment sector. It has been several years since then and these «posts» They don't make much sense anymore. But that doesn't mean that when Jeff Goodlach talks, we shouldn't listen to him, even if what he's saying sounds crazy, maybe even crazy. But let's get to the point.
Last Thursday, May 7, speaking on Bloomberg's television, he said his investment company is starting to prepare itself to deal with a possibility that could admittedly upset the American and perhaps the global bond market. The possibility to which it refers is that of restructuring US government debt.
According to the well-known administrator, his company moves on to changes in part of its bond portfolio (it has about $100 billion under management) in order to address this possibility, which could be activated if the American economy is in a state of recession. In this scenario, the US government could force long-term interest rate bond holders to exchange them with other lower ones.
In a hypothetical example he set, he said that this could include compulsory replacement of bonds at a nominal rate of 4% with other interest rates of 1% with the same maturity. This type of debt restructuring, which is linked to countries in Latin America and Africa which have permanent problems of failing to serve their debt, is rather inconceivable to the world's strongest economy.
According to Goodlah, such a decision could be triggered if the American economy falls into a state of strong economic recession, so public revenue would be critically affected and debt service would become practically impossible, as $31 trillion is a huge amount and its annual service costs are also too large.
There is no need to say that this would be a huge shock to the American and global bond market. As Bloomberg journalists pointed out, this would be a seismic event for the purchase of bonds.
For his part Goodlach said that this would cause a collapse in the bond market and the American public would from there face very significant difficulties in borrowing from international markets. This certainly does not upset Goodlach much, as he argues that this will solve the major American problem of overborrowing for which he has been ringing the alarm.
As expected, the White House and in particular Kevin Hasset, director of the National Economic Council, rushed to categorically deny this scenario. Speaking on Bloomberg television, he said that the Trump government believes in a strong fiscal policy and added that in a million years it will not do anything that reminds of a failure to repay debt.
It was certainly not possible to say anything else, even tomorrow morning if something like this had happened we would have found out immediately after the international internet. For the record, however, we must mention that Goodlach suggested that the chances of this happening are not much less than 30%, which does not sound very encouraging to us.
A few days earlier, on 4 May, again in Bloomberg, an opinion article by Alison Schrager, who deals with economic issues, dealt with the bond market. His title did not leave much room for misinterpretation: «Attention to the bubble – the bond market». According to the columnist, US government bond interest rates may not look too high, close to 4.30% for ten-year-long titles, but they are actually not as high as they should be. Schrager said that these interest rates are too low if one takes into account the fact that the American public debt is at this time slightly above the gross national product of the USA.
As he pointed out, with the figures of March 31, US government debt amounted to 100.20% of U.S. GDP, while based on current estimates of the evolution of things over the coming years, in 2030 the ratio of public debt to US GDP would have risen to 107%, surpassing the level of 106% observed in 1946, immediately after the Second World War. Schrager argued that the current yields of these bond instruments do not offer their holders sufficient protection from risks and above all inflation, as this yield is only 2% above the current level of inflation.
Schrager's view is that the US demographic bomb reported several times by JPMorgan bank CEO Jamie Diamond is a very great risk, as it is obvious that in the near future there will not be enough US citizens to buy the bonds issued by the US Treasury to meet its financial needs.
According to its estimates, international investors who so far cover much of the American public bond issues no longer have the same appetite for these titles, as they no longer trust the American public to the same extent as before, for obvious reasons in all of us.
This means that in order to lure potential buyers, the US public will have to offer higher yields, at the same time that there are very valuable options on the international bond market for high-quality government bonds, especially from countries in the European Union such as Germany.
Not to mention, Schrager simply argues that the yields of American government bonds are not enough to compensate their owners for the risks they take by buying them. In other words, he appreciates that they are overpriced, just like Jeff Goodlach, arguing that we may actually be talking about a bubble, more dangerous than what many call a stock bubble and Artificial Intelligence.
But like any bubble, no one can be absolutely sure that it exists until the moment it bursts. So in the case of American public bonds, if the concerns of experts like Goodlach, Schrager and several others are based, we will probably find out suddenly.
In such a case, the consequences will be extremely negative, not only for global bond markets but also for the entire global financial system in general. We know what's called «black swan» is an unforeseen event and in this case several have already warned us about the risks from the bond market situation.
But even if such an event does not fully respond to the definition of the phenomenon, its results will be exactly what one expects of a black swan.
