Why Are Markets Going Bonkers? Central Bankers Tried to Corner the Bond Market

June 22, 2018

 

The big questions being tossed around Wall Street today are: why are markets such a mess? Why are we getting these wild swings?

 

The reality is that the markets are NOT a mess. These are actually normal, healthy markets. And healthy markets move, sometimes a lot in a short span of time.

 

The real issue is that from ’09 until recently, the market was completely artificial because Central Banks cornered ALL risk by cornering the sovereign bond market.

 

Remember we are in a debt-based financial system today. Sovereign bonds are the bedrock of that system. They define the “risk free rate of return” against which ALL risk is priced. They’re also the primary collateral owned by the banks to backstop their trading/derivatives portfolios.

 

When the Fed and other Central Banks cornered sovereign bonds via ZIRP (front end of bond market) and QE (long end of bond market) they forced EVERYTHING to reprice to ridiculously low levels of risk. This bubble is unlike any other bubble in history in that it is truly systemic, affecting every asset class. Thus, today we have a primary bubble (sovereign bonds) creating secondary bubbles (corporate debt, housing, stocks) and even tertiary bubbles (short vol/ risk parity fund/ passive investing).

 

It truly is the Everything Bubble.

 

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