......lessons from Japan have taught me that, even if rates stay comparatively low, they can easily move 0.5-1.0% over a relatively short period of time, and a 1% move in the wrong direction can do a lot of damage to the P&L if it happens at the longer end of the curve (chart 1).
You may actually wonder who on earth is buying bonds at current levels? With 10- year yields now negative in Switzerland, and 5-year yields negative in several European countries, who in their right mind would buy a bond when you are guaranteed to lose money, assuming you hold it to maturity?
The most likely answer is that investors do not plan to hold these bonds to maturity. They are jumping on a gravy train that has been spectacularly successful over the past few years (chart 2). It is obviously a risky trade, as it is not inconceivable that there will be a stampede by the exit door when the first smoke can be smelled.
As one investor succinctly put it: “When the door closes, they won’t all fit through the cat flap.”
That is, in my book, a far bigger risk to the bond market than the Fed or other central banks suddenly overwhelming the bond markets with sell orders.
