Revenge Of The Bond Nerds

Well, what do you know? The participants of the Roman orgies that took place during the Debt Dump and Bail Saturnalia (feel free to add punctuation marks as you see fit) are finally being presented with the bill. It’s still in the process of being added up in toto, but it looks to be a doozy.
The irony is that – for the moment – the bill is being thrown at the face of those far less responsible for the mess than the big-time orgiastes. And to add insult to injury, the bill is summarily and contemptuously presented by that troupe of orgy-organizers who arguably made the mess much worse.

But, let’s explain things in plain Latin.

Recent days have seen a raft of sovereign-credit downgrades and warnings by Moody’s, S&P and Fitch, causing sharp rises in government bond yields and credit default swaps (CDS) for those affected. No doubt goosed by the (near-sovereign) collapse of Dubai, rating agencies are belatedly falling all over themselves to kick weakest-link borrowers in the groin, i.e. countries like Greece and Spain. Other countries like Italy, Portugal and Ireland are seeing their bonds come under pressure, too.

For example, look at the chart below tracking 5-year CDS for Greek government bonds.

Greek Government Debt CDS

After settling down from the late 2008 – early 2009 global panic, credit concerns rose again following some domestic issues (elections, dodgy statistics); but the catalyst that really spooked the market was unquestionably Dubai’s loud insolvency, which made everyone stand up and face facts.

The rating agencies are also dropping hints about the UK and US, but they are still far from daring (or foolish) enough to really step on such big toes, preferring instead the time-tested method of beating on black sheep (or scapegoats, if you are more classically educated in things Greek and Roman) in order to send veiled messages to the King.

So, what of the “bond nerds” in today’s title? (Apologies to my erstwhile colleagues – I use the term affectionately, of course). They are those ladies and gentlemen on trading desks and investment committees who have the decidedly unglamorous job of making markets and selecting straight, boring government paper to invest in: Treasurys, gilts, etc. They are very, very far removed from the hustle, bustle and juicy bonus pools common to more “meaty” structured debt securities. That is, they were – until the spectre of sovereign default raised its ugly head; suddenly, the nerds are running the show.

A 50 basis point swing in, say, the spread between Greek and German bond yields is enough to send global bond, stock and FX markets gyrating, causing massive stress to mandarins from prime ministers and central bankers, to Brussels-based bureaucrats.

What are the bond nerds saying, every time they hit a bid on the 10-year GGB or buy a Spanish CDS?

Simply this: Enough already with being so free with the taxpayers’ and our investors’ money… You guys can’t run massive budget deficits as far as the eye can see and raise debt levels to the sky, without paying the price. You can’t bail out the global financial system and keep unemployment down and consumption up, without us questioning your 1+1=3 arithmetic. You can’t have your cake and eat it, there’s no such thing as a free lunch – and funny money is no money at all.

Yeah, we may be nerds, alright, but you better take good care of us because you need us big time. Unless you want to walk the Minsky Way, that is…

Have a pleasant weekend (pondering government finances, perhaps?).