For the first time in its country's history, Portugal sold 6 month T-bills
at a negative yield. The 300 million euros ($333 million) worth of bills due
in November 2015 sold at an average yield of minus 0.002%. A negative yield
means investors buying these securities will get back less money from the government
than they paid when the debt matures.
To put this in perspective, the 10 year note in Portugal now yields just 2.38%,
down from 18% a mere three years ago. Back in 2012, creditors grew wary of
the countries referred to as PIIG's (Portugal, Ireland, Italy and Greece) and
their ability to pay back the massive amounts of outstanding debt. Consequently,
creditors drove interest rates dramatically higher to reflect the added risk
of potential defaults.
If a person had fallen into a deep slumber in the midst of the 2012 Eurozone
debt crisis and awoke a week ago, they may make some reasonable assumptions
as to why there was a collapse of Portuguese bond yields on the long end of
the yield curve; and even displayed negative yields on the short end.
Perhaps Portugal had finally balanced their budget? Or even is now enjoying
a budget surplus? To the contrary, that is not even close to the truth. Portugal
has not balanced its budget...its budget deficit now sits at over 3% of GDP.
Or perhaps there was a massive restructuring of outstanding debt? Upon joining
the Euro, Portuguese national debt was below the 60% limit set by the Maastricht
Treaty criteria. By the start of the debt crisis in 2009, that level of public
sector debt had edged up to 70% of GDP. However, the recession of 2009-12,
saw a rapid increase in the level of debt. Despite recent efforts to reduce
public spending and austerity measures pursued by the government, Portugal
still has an immense and growing debt load, with a current National Debt to
GDP ratio of over 130%.
Well then maybe there must be a dramatic deflationary cycle pushing those
paltry nominal yields much higher in real terms?
Wrong again! Portugal posted a positive CPI of 0.4% year over year in April
of 2015.
The truth is, the ECB would prefer bond vigilantes continue in that deep slumber,
while they use artificial intervention to "do whatever it takes" to eviscerate
markets and make sure sovereign debt yields never rise.
But eventually investors will wake up to the huge bubble in the bond market
that must pop either through inflation, or insolvency. And when yields normalize,
it will lead both the stock market and the economy into a depression.
However, the Charlatans in government and financial markets want you to believe
the inevitable rising of yields in Portugal (and in the rest of Europe, the
United States and Japan for that matter) will be a good economic sign. These
manipulators of currencies and destroyers of savings want investors to believe
they are privy to some ethereal information that only they are able to decipher.
But if that were true, why then have the economic forecasts from central bankers
been so incredibly inaccurate throughout history.
Likewise, central bankers also want you to believe that a rise in yields will
prompt a great rotation out of bonds and into stocks--catapulting the stock
markets to new highs. But higher rates in 2006 did not forebode an economic
paradise, and it did not propel a 2008 great rotation out of Mortgage Backed
Securities and Collateralized Debt Obligations into stocks. After all, did
investors in 2008 run from collapsing real estate and mortgage related bonds
into stocks when they became toxic...were they forced to put that money to
work into equities right away?
Everyone who lived through the 2008 financial crisis knows that when the air
came out of the mortgage bubble there was a lot of collateral damage. And in
2012 when the Portuguese bond market collapsed, investors weren't immediately
scrambling out of bonds in favor of stocks--they were aggressively shunning
both during that 2010-2012 timeframe. The Ten-year Note went from 5%-18%, while
the stock market was busy losing half of its value.
Central Banks around the globe have cranked up their bubble machines and are
pointing them directly at the bond market. The Portuguese Central Bank has
managed to engineer negative yields even though the nation has a positive rate
of inflation and has become basically insolvent. In fact, the international
bond bubble is vastly more pervasive and baneful than the NASDAQ and Real Estate
bubbles combined. Therefore, when the bubble in bonds finally bursts, at least
for a while, there will be very few places to hide outside of cash and owning
hedges to plummeting equity and bond prices. And hopefully then we will all,
with the perfect clarity of hindsight, acknowledge that allowing a small unelected
cartel of market manipulators the power to distort markets to such a degree
was a completely stupid idea.
Michael Pento produces the weekly podcast "The
Mid-week Reality Check", is the President and Founder of Pento
Portfolio Strategies and Author of the book "The
Coming Bond Market Collapse."
