Bond Spread Betting Markets and the Recovery
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So now we worry.
Much as it might surprise readers the biggest investment market in the world is not equities, it’s the bond markets. Sovereign, Supra National, Local Government, Corporate, Mortgage Backed even, in rare examples, personal issuance etc.
This market, if it is correct, is now telling us a worrying story of our future with low rates, low growth and possible deflation leading to recession followed by paltry growth followed by recession and so on.
The possibility of a Japanese effect occurring in the West has moved a step closer over the last few weeks as the glow of the rebound in the world economies after the financial crisis continues to wear off.
Long dated gilt yields have now dropped well below 3% to go with the US yields below 2.5% and Bund yields now at 2.2%. These levels are now lower than the period of the great depression.
To put it another way, for many years there have been desultory movements for the government to try to help out OAPs who bought undated War Bonds back in the Forties by redeeming them at par value. These bonds are now trading at 85 and anyone redeeming them would probably be considered foolish as they yield a relatively generous 4.15%.
The problem with this is that if the Bond markets are correct then the equity market is in for a terrible time but, although the US markets are looking fragile, the FTSE is actually not doing too badly.
Yes we are down a bit over the last week or so but even by recent spread trading price action it can hardly be described as disastrous. In fact we are pretty much in the middle of the last four month’s trading range and only 250 from the recent highs, but 350 from the recent lows.
So what is going on? Why are the analysts and the newspapers so full of dire warnings? On paper things look grim indeed. Home sales and new mortgages are falling off a cliff both in the UK and in the US and, as both countries are heavily tilted towards the service sector, this is generally assumed to be a harbinger of things to come.
Growth seems to be stalling elsewhere as well, aside from Germany of course, as governments rein in spending. Also the odd unexpected profit warnings from an array of small to mid sized companies has suddenly taken the sheen from the generally outstanding first half numbers that took markets up to their July/August highs.
Not only this but personal anecdotes seem to be starting to turn nasty as stores cut prices, car parks seem unusually empty even for the summer, restaurants are easy to book and redundancies in even well performing companies are making small headlines.
As mentioned many times in these comments we seem to have been in the process of a ‘jobless recovery’ which has now stalled. Remember the next batch of school leavers and university graduates is now hitting a jobs market that has virtually no capacity to absorb them.
Bond Spread Betting Markets - Companies Comparison
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| BOBL - Spread Size |
2 |
2 |
2 |
2 |
2 |
3 |
2 |
2 |
| BOBL - Min Stake |
£1 |
€0.70 |
£2 |
£1 |
£1 |
£1 |
£1 |
£1 |
| Bund - Spread Size |
3 |
3 |
2 |
3 |
2 |
3 |
3 |
3 |
| Bund - Min Stake |
£1 |
€0.70 |
£2 |
£1 |
£1 |
£1 |
£1 |
£1 |
| Gilt - Spread Size |
3 |
- |
2 |
3 |
2 |
3 |
3 |
3 |
| Gilt - Min Stake |
£1 |
- |
£2 |
£1 |
£1 |
£1 |
£1 |
£1 |
| Schatz - Spread Size |
2 |
2 |
1 |
2 |
4 |
3 |
2 |
2 |
| Schatz - Min Stake |
£1 |
€0.70 |
£2 |
£1 |
£1 |
£1 |
£1 |
£1 |
| US T Bond 10 Yr - Spread Size |
4 |
3 |
4 |
4 |
4 |
6 |
4 |
4 |
| US T Bond 10 Yr - Min Stake |
£1 |
$1.10 |
£3 |
£1 |
£1 |
£1 |
£1 |
£1 |
| US T Bond 30 Yr - Spread Size |
6 |
3 |
- |
6 |
4 |
6 |
6 |
6 |
| US T Bond 30 Yr - Min Stake |
£1 |
$1.10 |
- |
£1 |
£1 |
£1 |
£1 |
£1 |
Comparison Notes
The above comments do not constitute investment advice and neither Financial Spreads nor Clean Financial accept any responsibility for any use that may be made of them.
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'Bond Spread Betting Markets and the Recovery' edited by DB, updated 25-Aug-10
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