Another Crisis Coming, Worse Than the Last: Roche
The bond markets will crash once global central banks stop buying debt, triggering a financial crisis much worse than the one seen in 2008, strategist David Roche told CNBC.
Roche, who has previously warned that "safe haven" government bonds are the most dangerous place for investors to be in, said Wednesday: "Yes it [a financial crisis] will happen and yes, it will be bigger [than the credit crisis]. Once you re-price the burden of the world's debt... the ugly truth will be revealed."
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According to Roche, president of Independent Strategy, once the expansive quantitative easing programs initiated by Western central banks come to an end, sovereign bond yields, including U.S. Treasurys, German Bunds and U.K. Gilts, will spike significantly prompting a crash.
Yields on U.S. 10-year Treasurys have fallen more than 200 basis points over the past five years and are now around 1.8 percent. Meanwhile, U.K. 10-year Gilts and German 10-year Bunds were also trading near record lows on Wednesday at 1.8 percent and 1.29 percent, respectively.
"As long as the central bankers print money, the only way to have to distribute it is [for governments] to buy 70 percent of new bond issuance in these safe haven bond markets. As long as they go on doing that, the yields won't go up, and the day they stop, the yields will go up by so much we will have a financial crisis on our hands," he said.
Roche said the impact of a crash in the "safe haven" bond markets will be catastrophic for financial markets worldwide.
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"You are looking at a massive capital loss on a mark-to-market basis for a lot of financial institutions in the world and for people who have put their savings into those bonds, which will hit demand and hit the real economy, because if wealth goes down people's optimism about the world economy will fade," he added.
In recent years, major western economies have embarked on expansive bond buying programs in attempt to prop up flagging growth following the credit crisis. But speculation over whether the U.S. Federal Reserve will end its expansive bond buying program, has risen this year. In the Fed's latest minutes, it emerged that several committee members were concerned over the risks of continuing its asset purchases for too long.
The end of QE has prompted concerns over how markets will cope unsupported.
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Risk for Abenomics
One major economy that is only just starting its monetary easing program, however, is Japan, and Roche was bearish on the implications of the country's recently announced plans to pump $1.4 trillion into its economy.
Roche said the country is at great risk if its policy to revive the economy through aggressive monetary policy, fiscal stimulus and structural reform, known as "Abenomics" were to fail.
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"You have a domestic pool of demand in Japan which other economies do not have. Unless the Japanese domestic investor turns whistle blower the JGB market doesn't blow up. How could it blow up? If money starts to flee Japan because 'Abenomics' was a failure, then the whole thing could blow up," he added.
Yields on Japanese Government Bonds (JGBs) have reached record lows in recent times. The yield on a 10-year JGB is currently around 0.61 percent, down from 0.89 percent a year ago and dramatically below yields of over 8 percent seen in 1990.
The concern is that a return to inflation will lead to a spike in JGB yields making it more difficult for the Japanese government to repay its astronomical debt to GDP levels which are expected to rise to 245 percent in 2013, according to the International Monetary Fund.
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Roche advised investors to hedge the risk of an impending financial crash by going long on global equities and by shorting safe haven government bonds.