The canary in the 35-year bond bull market is singing

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Canary

Trying to pick tops in bull markets and bottoms in a bear is usually a worthless endeavor as there is a large graveyard of calls that were made at the wrong time, sometimes defined by years and decades (if you tried in Japanese bonds). But, if successful there is much money to be made and capital to be preserved.

With respect to the 35-year bond bull market globally, there have been many attempts over the years to say 'this can't go on any longer' especially with plunging bond yields driven by central bankers, exploding sovereign and corporate debt levels, and fears of central bank driven inflation via massive amounts of money printing. I'm now going to be one of those strategists/investors that is going to call the bottom in global interest rates and the top in prices.

I believe there has been a sea change in the behavior of sovereign bonds and something very amiss over the past two months. A lot is being made over what the Federal Reserve will or won't do this week but what investors should be most focused on right now is the longer end of global yield curves. The canary in the mine is now singing and that is the weakness in longer term Japanese Government Bonds and that I believe is the genesis for this uptick now globally in rates.

The Bank of Japan is the epicenter for the greatest experiment of monetary activism (I prefer calling it monetary madness) that we've seen in terms of the size of its quantitative easing relative to its economy. Therefore, changes out of Japan will have ripple effects everywhere. The BoJ and its governor, Haruhiko Kuroda, seem to be coming to the conclusion that destroying one's banking system by depriving banks of profits via flattening the yield curve to a pancake is probably not a good idea.

They have thus realized that a steeper yield curve is the better path and they plan to achieve that by buying less longer dated paper, buying more shorter dated bonds and maybe going further into NIRP which itself is a bad idea as it's a tax on capital.

Mario Draghi and the ECB are running into their own constraints in delivering its QE program. Negative interest rates are also destroying bank profitability and logistical limits are being reached in terms of sourcing enough bonds to buy under their current rules. As the epic bond bubble is global, we are all collateral damage if markets realize central banks are at the end of their road.

We know that buying bonds with a negative yield or anything close to zero is just a game of hot potato as these bonds are not assets of the buyers, they have become liabilities. Thus, when the selling occurs, the moves could be sharp and would of course impact almost $13 trillion of negative yielding securities, let alone another $10 trillion of bonds yielding between zero and 1 percent.

What we are now seeing with bond yields and central banks is also about control - control of what they want to bully. When things are perceived to be under control, confidence in asset prices are a result. Once that control gets questioned, confidence slips and asset prices become very vulnerable. The Japanese have lost control of the yen, its stock market and now maybe the long end of their curve (which as stated may be intentional). We should go to bed each night and awake in the morning looking to see what the JGB market is doing.

And as for stocks, let's not kid ourselves, near record highs are not a reflection of the earnings outlook and the state of the U.S. and global economy. It is all about the level of interest rates and money printing. If bond yields start to reprice, stock prices with the current extreme valuations have much further to go in what is MAYBE the beginning of a broader selloff. How many times have you heard 'stock prices are attractive considering the level of interest rates'? Well, if bonds are in a massive bubble, stocks are too, by default.

Commentary by Peter Boockvar, the chief market analyst for the Lindsey Group and co-chief investment officer at Bookmark Advisors. Follow him on Twitter @pboockvar.

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