Sign of a Bond Bubble?

"Way down here, you need a reason to move," begins James Taylor in his classic hit, "Mexico." So investors must have had their reasons for making an aggressive move into the 100-year bond issued by Mexico yesterday, but the lack of clarity on those reasons is making some nervous that it is a sign we’re entering a credit bubble.

"Leakage from the Western stimulus is creeping into all areas of emerging market currencies and fixed income," said Tim Seymour, founder of and manager of a hedge fund focused on international markets. "I don’t think we’re in an emerging market debt bubble yet, but I am concerned."

Japan this week was the most recent example of a global central bank to proceed with quantitative easing, an extraordinary way to keep rates low by actually purchasing assets like government bonds in the open market. The trend has caused a so-called currency war according to the IMF, as rival countries see who can cheapen their foreign exchange by the greatest amount. The side effect is a steady rise in global bond prices and a drop in yields.

Mexico’s bond has a 6.1 percent yield maturing in October 2110. The bond increased today from its issue price of $94.28.

"The Mexican 100-year bond issued Tuesday provides yet the latest illustration of the effect of quantitative easing on the credit markets," said Jeffrey Rosenberg, global credit strategist for Bank of America Merrill Lynch, in a note. "Lack of yield in risk free alternatives forces investors out the risk spectrum – either down in quality or out in maturity – in search for yield."

In his note entitled "100 Years of Solitude," Rosenberg says that both forces were at work here.

The Mexican stock market closed at a record high yesterday. Today, the country said inflation was below economists’ expectations, keeping a bid under bonds.

See you in Mexico in 2110.

For the best market insight, catch ‘Fast Money’ each night at 5pm ET and the ‘Halftime Report’ each afternoon at 12:30 ET on CNBC. 


John Melloy is the Executive Producer of Fast Money. Before joining CNBC, he was an editor for Bloomberg News, overseeing the U.S. Stock Market coverage team

Be the first to comment

Leave a Reply

Your email address will not be published.


Confirm you are not a spammer! *