Yes, of course we all know that the price of fixed-income paper moves inversely to yields, and the faster the rate rises, the steeper the bonds' slump. But investment-grade bonds have not been collapsing this year and, if anything, the yields on some of these have actually been declining despite looming potential UK and US rate rises. During July, UK and US sovereign yields are broadly unchanged - as they are over a rolling 12-month period. Meanwhile, those in many European countries fell last month. Something doesn't add up, or somebody is wrong, or maybe they are lying to us. We investigate.
Have central bankers been crying wolf? They certainly have been economical with the truth, telling us that things will get back to normal in a jiffy - yes, since 2009. Panglossian, mañana, turn the corner - all those old clichés rolled out in force. And things haven't reverted to norm, with wage growth negligible (except for FTSE 100 CEOs) and almost no inflation, making a pay rise in a fragile economy hard to justify.
Or perhaps central bankers are just plain wrong. That they ought to have realised by now just how anaemic the economic 'recovery' has been - in the US the slowest since WWII, coupled with record unemployment in several European countries. How can they possibly say they've fixed the problem when American labour-force participation at 62.6 per cent is at its lowest since 1977? When youth unemployment and underemployment affects almost half of those under the age of 24 in Europe?
UK CPI
Looking at it another way, the cause of the current malaise might be the hideous and record levels of consumer debt; people just couldn't juggle their credit cards if rates were to rise. Likewise a lot of 'zombie' companies, given a lifeline via ultra-low borrowing costs, would go under sucking with them all creditors - and of course, the banks.
UK 2-year gilt yield
Maybe savers hold the key, so-called excess savings always in search of a safe home. The current pet hate is the Chinese, blamed for the derisory rates of return on cash across the globe. Certainly UK pension funds are perennially snapping up very long-dated debt. Last month £4bn-worth of 53-year UK government debt attracted £15.5bn-worth of bids. Maybe their continental counterparts have cottoned on to this way of thinking, matching assets to liabilities; another side of the new cautious banking mantra and you know it makes sense!
UK 30-year gilt yield
The other possibility is that, as economists say, on the one hand analysts follow conventional thinking while bond dealers at their firms plough another, maybe lonely, furrow. Data on US primary dealer holdings of coupon-paying US Treasuries show that investment banks have joined hedge funds in increasing their holdings in July by $42bn and their highest in four months. Meanwhile, large speculators have the most open TNote futures positions in two years. Many are putting this down to inflation expectations, where US break-evens have dropped from 1.95 to 1.68 per cent since the beginning of July.
US 10-year Treasury yield
The latest rethink is coming from China where some believe that currency wars might export deflation.
