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Bond yields spike as delivering alpha investors voice negative views

Paul Singer
David A. Grogan | CNBC
Paul Singer

Comments from major investors at the Delivering Alpha conference added fuel to an already sour mood in markets and concerns that the world's central banks just can't get it right.

"With the rates that currently exist in global bond markets, the term safe haven applied to G-7 bonds is just plain wrong. These are not safe havens. There is a tremendous amount of risk in owning 10-, 20-, 30-year bonds at these rates," said Elliott Management President Paul Singer.

"So sell long-term bonds is my outright recommendation of an asset class," he said. "And the reason I called it the biggest bubble in the world is because the bond market is $60 trillion, roughly. And it's at prices and yields never before seen and containing a tremendous never-before-seen asymmetry between potential further reward and risk."


Investors also discussed the world's central banks and the fact that many view them as hitting a wall in terms of their ability to stimulate the global economy. The Federal Reserve has been slowly moving toward a rate hike, as it tries to swim against the tide of negative yields and massive easing programs by other central banks.

"Did Singer help push it? Yeah. He said the exact same thing in August. The difference is even though (Fed Governor Lael) Brainard got all the press this weekend ... the difference is (ECB President Mario) Draghi on Thursday said we have to re-evaluate what we're doing. You had Singer. You had Jamie Dimon yesterday," said Andrew Brenner, global head of emerging markets, fixed income at National Alliance. JPMorgan CEO Dimon on Monday said it's time for the Fed to raise rates.

The CNBC/Institutional Investor Delivering Alpha conference also coincided with a 30-year auction that traders described as weak. Rates moved higher after the auction, with the 30-year yield rising to 2.478 percent. The 10-year yield also rose, reaching 1.75 percent, the highest level since early June. Bond yields move inversely to prices.

Draghi on Thursday surprised markets when he did not discuss the prospect of taking the further easing steps markets were expecting.

"Look at what the Fed is doing and global central banks. I think they're beginning to rethink the efficacy of these ultra-low interest rates," said Bill Miller, chief investment officer of LMM. He told the conference that higher rates would not be an impediment to capital expenditures. "They are an impediment to the system. So I think just the rethinking of that policy is something that's likely to lead the curve to shift up."

His recommendation was to short the U.S. 10-year note.

Stocks sold off sharply Tuesday, with the Dow down more than 200 points in afternoon trading, reversing a large gain from the previous day. Shares rallied Monday after Brainard said the Fed should be patient about hiking interest rates, implying that the U.S. central bank would not raise rates when it meets next week. Equities sold off sharply on Friday after some hawkish Fed comments and after the ECB did not press further easing.

Singer also discussed the popular risk parity trade, where investors bet that stocks and bonds will both go up together in a low rate environment. The unwind of that trade has been worrying the markets.

"Today, we're just seeing a continuation of the post-Draghi bludgeoning," said Ward McCarthy, chief financial economist at Jefferies. "My take on it is it's post Draghi redux. There's anxiety that the day will come when QE ends. That's why you had such a correlation between stocks and bonds. The reaction would be very different if it really was Fed anxiety."

Justin Lederer, rate strategist at Cantor Fitzgerald, said the Treasury market also hit some key technical levels that added to the pressure. "There's a lot going on today. You started the day with just a continuation of (European government bonds) going down. Now we have the bond and equity trade. You couple everything together and I wouldn't put one thing behind today," he said.

Lederer said the 30-year auction, which fared poorly, was also a factor. "To see this type of move, it's definitely something supply related going on," he said. "Then you have a lot of people talking about the Fed, talking about rates. ... We're at a crossroads here."

Strategists say the markets had been too complacent, and the recent volatility around global rates is not unexpected.

"(Bridgewater's Ray) Dalio came out earlier today and said the Fed shouldn't be raising rates," said Lederer. "What is the BOJ going to come out and do at their meeting next week?" Dalio appeared at the conference Tuesday morning.

Separately, Nikkei reported during the afternoon that the Bank of Japan plans to take interest rates further into negative territory ahead of its meeting next week.

The yen instantly weakened against the dollar, and the yield on the Japanese 10-year moved further into negative territory.