Bank of America warned of the risk of a collapse in the bond market

Investors often wonder, “if by the end of the era of ultra-low yields”, says Bank of America Merrill Lynch (BAML), in his review for the 12th of August (have). Bank customers are more worried about “irrational exuberance” (a phrase that was first used in 1996, the then fed Chairman Alan Greenspan) on the markets of securities with fixed yield, but to sell the bonds, they are not yet ready, says BAML analyst Michael Hartnett.

Bank of America — not the first, who warns that bond prices climbed too high. This week managing Director J. P. Morgan Asset Management Oksana Aronov wrote in a column on the website InvestmentEurope that bonds with negative yields, where in the world it has traded more than $10 trillion, actually turned into the equivalent exchange-traded products (commodities) such as oil or gold. In circumstances when the investor purchased the paper, deliberately losing, if you hold it to maturity, there is only one rational calculation — that there is someone who will pay even more (the greater fool theory”), wrote Aronov.

In June, American financier bill gross said global bond yields have never been so low “500 years of documented history”, and that “supernovae that will explode one day”.

Writes Hartnett of BAML, defensive assets such as bonds or their substitutes, are becoming more vulnerable to the next round of monetary policy tightening in the United States. Hartnett cites the example of the situation in 2013 when the fed announced plans of tapering quantitative easing (QE), as the market reacted to the sharp decline in bond prices and, consequently, increase yields. Since then, the fed had raised the key interest rate and postpones until next raise, and in the meantime not only the country, but companies have started to place the paper with a negative yield.

Investors are in no hurry to get rid of the bonds, notes Hartnett. To sell the bonds right now would mean the same thing to sell shares of American technology companies in August 1999, eight months before the dot-com bubble has burst, says the analyst. The catalyst for the surge of yields in the bond market can be a traditional August meeting of the fed in Jackson hole (scheduled for 27-29 August), says Hartnett. There the head of the fed Janet Yellen may make statements that would indicate the determination of the fed to tighten monetary policy.

Losses of investors in case of a sudden increase in yields of sovereign bonds can be very large. According to Goldman Sachs, if the yield of US Treasury bonds will suddenly increase by 1 percentage points, the losses of holders of bonds will be about $1 trillion.

BAML believes that 2016 and 2017 is likely to be a time of transition to a more balanced mix of monetary and fiscal policy around the world. In the last 8 years, the Central banks poured money into the financial sector, and the government abide by the austerity measures. Soon the monetary stimulus will become less, but the government will be able to conduct targeted fiscal stimulus, predicts investment Bank. In anticipation of these structural changes, investors should switch from “financial” assets (stocks, bonds) into “real” (raw, property) and assets that benefit in the “deflationary” times (us dollar, government bonds), assets, favorable in terms of inflation (gold, commodities), says BAML.