Are safe havens still safe?
Posted on 27. jan, 2012 by Riskelia in Weekly Focus | Commentaires fermés
The risky assets revival may be good news for markets as a whole… certainly not for safe haven sovereign bonds…
In figure 1, we have represented a bond total return index since 2000 (composed of Gilt, T Notes of different maturities, Bund, Bobl, Schatz) together with the average bond bubble on the same basket of sovereign bonds and the average equities trend on a basket of European and US stock indices.
We recall that our « bubble » indicator is a signal between -100% and 100%, only based on the past history of market prices and reflecting the regularity of a price signal over different horizons (from a few months to a few years): a bubble indicator above 40% (resp. below -40%) signals excessive regularity in the rise (resp. fall), hence herding behavior and momentum instability.
There are four important messages from this graph:
- The last decade has seen seven occurrences of bond bubble over 40%:
- Dec 2000/Apr 2001: aftermath of the dot com crash
- Sept 2001/Nov 2001: Sept 11 attack
- Sept 2002/Jul 2003: Enron/WorldCom corporate credit crisis
- Feb 2008/Apr 2008: Bear Sterns’ demise
- Dec 2008/May 2009: Lehman’s fall, interbank market arrest
- May 2010/Dec 2010: first euro sovereign crisis
- Aug 2011 onwards: second euro sovereign crisis
- Of these seven episodes, six have been associated with negative equities trends, and one (the May 2010/Dec 2010 episode) associated to a neutral equities trend (down from a bubble situation just before the May 2010 euro sovereign crisis).
- Most of these bubbles have ended with sharp bond depreciations (5% mean fall on peak-to-valley episodes of 110 days in average) coordinated with broad equities rallies (figure 2); however, there are two episodes where the equities rally has largely preceded the ultimate bond bubble burst:
- In Sept 2002/Jul 2003, equities boomed after mid-march 2003 and bond prices peaked only three months after in June,
- In May 2010/Dec 2010, equities rallied from the beginning of Sept 2010 and bonds started their free fall one month after in October
- We currently are at a critical stage combining a bond bubble over 50% with a seven-weeks-old equities rally
A high bubble score always reflects a castle of leveraged positions which can easily unfold into a cascade of chaotic positions unwinding should the trend reverse, hence the difficulty to predict the exact timing and consequences of the final blow. Nevertheless, if we trust recent history, the bond bubble is probably living its very last moments…
Figure 1: Bond bubble (red), equities trends (blue) and bond total return index (black) since 2000; the periods of bond bubble above 40% are in grey
Figure 2: Some statistics on the six bond bubbles of the 21st century
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