There has been plenty of excited talk about the global bond rout lately butmany private investors havent been paying attention.
Stock markets dominate their thoughts, while most ignore the big, scary and complex $76 trillion bond market.
Even a 35-year bull run couldnt change that. Most ofus leave bondsto the professionals.
But the bond market still matters, especially when threatenedby an earthquake.
More than three decades of declining interest rates look set to reverse, with the US Federal Reserve hiking interest rates, possibly as soon as September.
Rising rates and a return to inflation are bad news for bonds because they pay a fixed level of interest, whose value will fall in real terms.
Yields have risen and prices have fallen as worried investors head for the exits.
Small Movements, Big Losses
In the last two months, German bond prices have risen from an all-time low of 0.05% to as high as 0.83%.
That sounds small beer, and is partly a reversal of the crazynegative interest rates we saw recently, but if they were to rise to, say, 1%, that would represent a total capital loss of 9.1% from their recent low.
And if they hit 1.5%, that would equate to a 13.5% loss.
Emerging markets are the most vulnerable, especially those that have loaded up on dollar-denominated debt.If the Fed hikes rates and the dollar strengthens as a result, the cost of servicing that debt will spiral.
There arealready signs of sharp outflows from emerging market debt funds.
China hasresponded with aggressive monetary easing that has sparked what may bea last-ditch stock market bubble: the MSCI China Index isupmore than 20% this year.
But the underlying economy is still slowing, with GDP growth set to fall to 7% later this year, down from 7.4% last year (if you believe the official figures).
That is the slowest pace of growth since 1990.
Even if Chinadoes avoid a hard landing demand for commodities will ease as it makesthestructural shift from industrialisation and urbanisation into consumption and services. It doesnt need any more ghost cities.
BHP Billiton and Rio Tinto have repliedby ramping up production and there are signs that cheaper prices have successfully driven out lower margin rivals.
That is some consolation, but if the bond rout deepens it could still leave both companies in a hole.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.