What Happens if the Bond Market Breaks?

Published on
November 1st, 2017
19 minutes

What Happens if the Bond Market Breaks?

Presentations ·
Featuring Raoul Pal

Published on: November 1st, 2017 • Duration: 19 minutes

If the bond market breaks, then everything changes. Raoul Pal updates his view on bonds, against the backdrop of tax reform, the unwinding of QE and a revamped Fed. Could the secular trend in bond yields be about to reverse and what are the implications for the major asset classes? Filmed on October 26, 2017 in the Cayman Islands.


  • SP
    Stephane P.
    17 January 2019 @ 01:22
    Japan is showing us the way, with 1/3 population over 60 years old. Japan-isation of the Western World means eventually the UST will buy all Govt debt, rates will go back to zero, the Balance sheet of the FED will skyrocket (the total of the balance sheet of BOJ is 1 year of Japan GDP !!! ) and there will be no yields nowhere. Raoul and Grant are simply amazing guys. Thank you.
  • Dd
    Deon d.
    23 May 2018 @ 21:04
    Hi Raoul, the ZAR/USD chart is incorrect... typo? (although your comment about the USD strength against the ZAR is correct).
  • DY
    Dmytro Y.
    7 March 2018 @ 06:16
    Hi Raoul, may we have an update to this thesis based on today (March 2018) situation?
  • cb
    chris b.
    15 January 2018 @ 16:49
    DXY continues to break down. Thesis change for Raoul? Or is this further coiling the spring for move higher?
  • TT
    Timothy T.
    19 December 2017 @ 11:26
    A secular trend change would require central banks to allow govt debt bubble to explode, allow long delayed attrition of zombie banks and firms, and an economic rebalancing that will be painful. Or they can monetise and debase. The former is a very low probability outcome given that the lunatics are running the asylum. So ultimately, everything will be captured in the FX markets. So the real question will be whether the dollar reserve holders do their math and understand over the next decades, US has to monetise approx US$100trn. If they do, there will be a steady move away from USD.
  • JF
    John F.
    19 November 2017 @ 01:12
    I thought the long term bond rate after 1980 declined because unlike the period 1948 to 1980, foreign governments bought US securities. Secondly, Wholesale Price deflation existed throughout the 1950's in spite of the accelerated consumption due to pent up savings during the War. From 1948 to 1980 the long term interest rate followed the Wholesale Price Index like the cable on the Golden Gate Bridge. Post 1980 there is a disconnect directly related to the US pushing its debt upon foreign governments. This is also coincident to going off the Gold standard. With regard to the USD getting stronger over the next six months, I concur. However, I see the reason as getting the US corporations into position to have maximum purchasing power overseas timed with a major Stock Market correction bottoming approximately May 2018. A potential (but not required ) second bounce in August 2018. A rapid rise in Equities would then occur six months ahead of the recovery. If you extend the rate of change in the %NYSE above its 200 DMA. You arrive at that juncture. Intermediate corrections are running every nine months. Sector rotation is touting end of cycle warning signs. NASDAQ is always the last to go.
  • JO
    Johnny O.
    11 November 2017 @ 22:15
    Wow, this piece could not have been better timed. Bond prices peaked in September and then made a move down. In the middle of a rebound from 26 October, Raoul publishes a piece saying that bonds can go down further and that this view, while contrary to his longer term bonds and yields outlook, has merit. Sure enough, the bond decline resumes on 7 November and has been tradeable. Additionally, the high yield ETFs have also weakened at last.
  • nd
    nicolas d.
    2 November 2017 @ 12:08
    same old same old. nothing new or clearly actionable there
    • MM
      Michael M.
      3 November 2017 @ 21:11
      How is this not actionable? Short EURUSD is one actionable trade from this presentation. You want him to put the trade in for you with an accompanied execution plan?
    • JO
      Johnny O.
      11 November 2017 @ 21:36
      He specifically said you could buy or call TBT. Which conversely means you can short or put TLT, or the bond futures or the note futures. All of which are working out very nicely. As is shorting the junk bond ETFs (JNK and HYG).
  • AC
    Andrew C.
    2 November 2017 @ 03:31
    Thanks Raoul; Fantastic. However your almost "throw away line" on EuroDollar futures options confused me. US interest rates to be lower in 2-3 years and Eurodollar rates to be higher? Shouldn't they track each other rather closely? Else US depositors would just open an account in London/Singapore/Hong Kong?
    • JL
      J L.
      2 November 2017 @ 10:06
      eurodollar rates to be lower as well, eurodollar contracts higher as they are expressed as 100-rates
    • MO
      Mike O.
      8 November 2017 @ 22:44
      I'm still working my way through the "Eurodollar University" series over at https://macrovoices.com ... with Jeffrey Snider providing some great insights and incredibly helpful information on a topic which I was totally clueless about until Erik Townsend had him on as a guest to discuss this topic. For anyone who is similarly lacking in any knowledge of Eurodollars, I highly recommend checking out the series.
  • Sv
    Sid v.
    7 November 2017 @ 21:37
    always clear, precise and very valuable, thank you
  • PM
    Paul M.
    6 November 2017 @ 10:05
    Nice ideas, enjoyed the talk, especially bits on demographics. Completely agree on interest rates, however, saying that DXY has "turned" by rallying 3 figs after dropping more than 10 is strange to me. Also, the H&S everywhere in FX? Really? It's one of the more common continuation patterns that's out there, especially when this pattern is highly visible. The big question is at what lvl Raoul is throwing in the towel on DXY trade? Is it 90? is it 87?
    • JL
      J L.
      6 November 2017 @ 22:08
      He has stated in the past that 93 would start to question his thesis and admittedly very nervous at 92, all based on historical max retracement of 10% in DXY bull markets
  • VS
    Victor S. | Contributor
    5 November 2017 @ 11:11
    Raoul you make a fair case - but please ponder the fact no one discusses “the trend of politics” ie the would is trending towards socialism sans Brexit ( which refuses to happen) and Trump who is being converted into a Neo-Con. Thereby they worlds debt is hyperbolically exploding. Since 1971 world debt is now 217 trillion$. That is a 12.1% compounded increase! Any weakness in debt creation cause the dollar to fall. This leads to hyperinflation. Death to the dollar and bonds. I would rethink your big picture? Victor
    • SS
      Sunil S.
      5 November 2017 @ 18:35
      Victor I am not so sure Raoul disagrees with you. I think the difference is relative dollar strength vs. absolute dollar strength. Even as the dollar loses purchasing power, you can still have flows into the dollar from other currencies. You are saying the former will happen, and Raoul is saying the latter will happen. I think you're both right.
    • MO
      Mike O.
      6 November 2017 @ 21:54
      I don't know what anyone's opinions of Martin Armstrong may be here on the RVTV discussion group, but from what I understand about him is that he has compiled the most extensive database of monetary history information of many (most? He may say "all", being as modest as he is). In any case, he has stated that the country with the reserve currency never experiences hyperinflation (which is what I think you mean by "fall"). The most compelling case (to me) is the Austrian theory of a "melt-up" in the dollar, pushing up to the 120 range as markets elsewhere suffer from a lack of confidence (or outright panic). Afterwards, who knows? (I'd love to see RVTV get some more historians and discuss what happens when markets collapse ... if prior collapses have anything to teach and if they can separate out what may be irrelevant in past crisis vis-a-vis what appears to be unfolding today ... which has many aspects, such as global debt levels and negative interest rates, that are totally unprecedented in world history).
  • AS
    Abdul S.
    5 November 2017 @ 16:52
    Will we re-test the neck line on eurusd or dxy? Be a good place to short if it happens.
  • SD
    S D.
    2 November 2017 @ 23:33
    Could somebody please explain the difference between debt "jubilee" and debt "default?"
    • MO
      Mike O.
      3 November 2017 @ 18:09
      One sounds better than the other. The term will likely be used, when the time comes, and said by a politician during some interview or in some pronouncement who will also make it sound like they are doing all of us a favor by doing so (just like they do when they take our money to spend it on things ... but only those things that are in our best interests, of course).
  • JH
    Jesse H.
    2 November 2017 @ 10:53
    Brilliant - loved this...it's because of presentations like this that I signed up to RealVision. Thoughtful, articulate, carefully constructed analysis. Respectfully disagree with some of the chart analysis done and conclusions drawn. While it's very tempting to get into the mix right now, I just think there is way too much uncertainty out there right now to make short-term calls. And, perhaps most importantly, we are not in many of the G8 countries plus China dealing with a free market system anymore. We are dealing with (1) tightly controlled markets by an elite cadre of central banks and increasingly concentrated, larger players in the system; (2) misleading (frankly inaccurate) CPI metrics in the US and even other countries; and if that weren't enough, (3) we are probably closer to war in the US than at any time since the Cold War (and possibly even closer than then). Item (3) is based on a recent stay in the US where I had the luxury of travelling around the country and getting a sense for how things are going. Parts of the US feel like they're a tinderbox right now...with the prospects of civil conflict very high indeed and a more polarised society than at any time in my lifetime. Suffice it to say that I am deeply concerned about America, and therefore, about the prospects for political stability both in the US and abroad. Raoul's analysis is probably pretty solid if we're looking at a world of business as usual - the problem is that we are no longer in a business as usual case. We are staying down the barrel of conflict between the US and N. Korea and serious conflict with China as well which could impact US treasuries. There are simply too many higher probability exogenous events that can impact markets, and therefore, capital is at higher risk than usual. My view is - look at niche opportunities in markets somewhat isolated from the US / Europe / Japan / China, and look to invest in tangible, hard assets for now to retain some measure of stability and purchasing power in the odd times ahead.
    • JH
      Jesse H.
      2 November 2017 @ 10:55
      Oops - "staring" not "staying."
    • RA
      Ricardo A.
      2 November 2017 @ 20:07
      And what's your view as to what would happen to yields in case war/civil war breaks out?
    • JH
      Jesse H.
      3 November 2017 @ 14:06
      Hi Ricardo - I don't know enough about the bond market to really comment on what would happen to yields with much confidence, so will leave this one to savvier viewers on the forum. But, if I had to make a wager, my sense is that yields would probably spike initially (or at least rise significantly) and then drop with any "promises" of Fed action (QE).
  • SC
    Shane C.
    2 November 2017 @ 23:44
    Nice call Raoul, I thought you might be wavering based off of your last discussion with Kyle Bass. Not going to lie though, I was beginning to think my strong dollar thesis was wrong as well. It's going to be interesting for sure. I think it's hard to disagree with your position when the Eurodollar market is so stretched and dollar demand is so damn high. Great short clip!
  • Nv
    Nick v.
    2 November 2017 @ 06:36
    It might be worthwhile trying to get Jeff Gundlach on Real Vision to get a balanced view of bulls and bears
    • SD
      S D.
      2 November 2017 @ 23:32
      Thumbs up to that idea. Gundlach was on vanityfair.com series, really worth a listen. Would be great to get him on realvision, pin him down more on his outlook.
  • MO
    Mike O.
    2 November 2017 @ 21:45
    For a viewpoint in harmony with Raoul, you may find an interest in listening to the viewpoints of Rick Ackerman in this interview, who seems to agree on many of the points made in this video (although, not as many specifics in it, as it is only eight minutes or so in length) - http://www.kereport.com/2017/09/13/usd-why-rick-thinks-we-could-see-120-on-the-usd-index/ Personally, I find both Raoul and Rick Ackerman to both be very pursuasive ... my only question for either of them is "what is the timing?". I don't see it playing out until the 2020's ... but, then again, what do I know?
  • LJ
    Lucille J.
    2 November 2017 @ 21:28
    food inflation drug price inflation health care inflation gas inflation rent inflation smartphone inflation
  • AH
    Andreas H.
    2 November 2017 @ 18:05
    Super, thank you your view!
  • IP
    IDA P.
    2 November 2017 @ 17:59
    thank you so much, hope you can update crude oil view, you said you would question the short call if crude oil went back up to 54/55$
  • TP
    Tom P.
    2 November 2017 @ 17:09
    Short and sweet. Showed your working. Thanks Raoul. Needs more mood lighting. 👍🏻👍🏻
  • DM
    Daniel M.
    2 November 2017 @ 16:21
    Thanks for the update Raoul. This is why I purchase RealVision.
  • AC
    Adrian C.
    2 November 2017 @ 12:21
    Great. Thank you Milton.
  • RL
    Radu L.
    2 November 2017 @ 10:06
    any chance we can get Jawad Mian's view on this, pls?
  • TJ
    Terry J.
    2 November 2017 @ 10:02
    Priceless! Raoul is one of a handful of analysts whose views on the macro picture for bonds and currencies I rate most highly. On Treasuries, Raoul and Dr Lacy Hunt have been consistently right for several years, while the bearish herd, prematurely calling the end of the decades old bond bull market, has grown and grown and now includes highly distinguished and respected bond experts like Jeff Gundlach and Bill Gross. As Raoul warns, he could be wrong and they right, but my money is with the deflationary trend to continue for many more years yet for the reasons so concisely and clearly explained in this video. Just a few videos like this every so often, more than justifies my RVTV subscription. Thank you RVTV.
  • BF
    Bret F.
    2 November 2017 @ 09:57
    Thanks Raoul, Could technology acceleration even be quicker than you have thought. Effecting Volatility,Making Trader's less reactionary, Making world leader's less reactionary. On and on. Because even i. A middle income Midwesterner. Knows within minutes... North Korea missile launch, election results in Zimbabwe, Nearly to the tick every market move in the world... Just makes me wonder (o; Great walk thru your thought process and trade ideas. Being dollar bullish has hurt many folks. (just look at chart from 1980's) Takes time to come around. Could sideways be the way for months or years???? Bonds ....some one has been busy buying puts in IEF. (never more than a few hundred per strike, Now a few 10,000 in there) watching to see if folks pile in... i did...lol
  • JO
    Johnny O.
    2 November 2017 @ 09:46
    There is evidence that the Fed follows the short-term market, rather than "sets" rates. What if rates go up, not because of (the mirage of) a strengthening economy or inflation, but because buyers just start to get more realistic and fearful about the possibility of reliable repayament? The junk bond ETFs are looking shaky.
  • SB
    S. B.
    2 November 2017 @ 09:15
    I agree with the demographic disinflationary pressures, but I do believe that the central banks can and will create inflation. 'Helicopter money' will return at some point, debt jubilee in some form is likely (possibly first in Japan and China). It also comes down to how you define and measure inflation. Asset price inflation will probably continue . The FED has already said it will do new QE is some form if there is a recession. General perceptions have changed, what was once inconceivable policy a few years ago is being seriously discussed or has already been implemented. Higher USD and lower EUR means higher EU stock prices? Or the opposite, a retreat of money due to Trump tax repatriation. This money is surely invested somewhere, but where (Europe?). If the USD goes higher fast it can make unhedged investing in Europe less attractive during this appreciation. And will a possible USD strength finally impact the Emerging Markets?
    • SB
      S. B.
      2 November 2017 @ 09:20
      Also, the fair value of the Euro is said to be at 1.20-1.25. (According to the IMF and others). With the economy of Europe gaining traction, why would the value of the Euro fall that far? What if Trump appoints a dovish FED, which he is surely inclined to do? I can see the USD go somewhat higher in the short term, but I just don't see a reason for such a depreciation of the Euro in the short term at least.
  • NR
    Nuno R.
    2 November 2017 @ 07:31
    Extremely well articulated thoughts, thanks Raoul.
  • Nv
    Nick v.
    2 November 2017 @ 06:34
    Repatriation is unlikely to be USD bullish. The bulk of US company offshore cash is held in ....USD already Technical target for DXY at 97.20
  • LC
    Liliana C.
    2 November 2017 @ 05:11
    Absolutely brilliant!!
  • LA
    Linda A.
    2 November 2017 @ 04:58
    Yes, dollar is getting stronger- u can see the break out already in effect on the long-term chart. I would like to hear Gundlach's & Gross's current view & what implications they foresee. RP, I am in your camp. All pundits keep re-iterating crash of the dollar. I assume that will come after the dollar's strength destroys EM & commodities.
  • WB
    Wes B.
    2 November 2017 @ 04:09
    I doubt we even get much more of a spike in yields. Long dated treasuries are already well off their recent lows.
  • DC
    D C.
    2 November 2017 @ 03:25
    Great piece. Question about the demographics and CPI/ Yield chart labeling though. The way it's labelled, the US Birth as % pop is in red, while the CPI/ Yield in Blue. Should be the other way around, right? The birth rate pushed up 30 years informs pending CPI and Yield, not the other way around as it is shown.
  • MS
    Matt S.
    2 November 2017 @ 03:16
    No comprendo... : \
  • CS
    Charlie S.
    2 November 2017 @ 01:22
    Thanks Raoul! Concise and timely! Can I agree with you on the dollar and the 10 year treasuries even though I am an oil bull?
  • RR
    Raj R.
    2 November 2017 @ 01:13
    The only missing piece is the fed. What if they slower the pace of hikes and turn extremely dovish? Wouldnt the dollar go lower? It is hard to beleive they woukdnt do anything as the dollar climbs esp
  • js
    jacob s.
    1 November 2017 @ 23:38
    what famous piano song sounds like this
  • SD
    S D.
    1 November 2017 @ 23:31
    Really helpful and clear, thanks Raoul.
  • RS
    Robert S.
    1 November 2017 @ 23:31
    Unfunded liabilities included, every American tax payer is 1000000 dollars in debt. I find it quite brave to loan money to the US by buying bonds. Time to get real isn’t it?
  • RD
    RP D.
    1 November 2017 @ 23:23
    That was a great presentation Raoul. My favorite video in quite a while. Thank you.
  • JT
    Jayne T.
    1 November 2017 @ 22:55
    China wants to disintermediate the dollar, esp. vis-a-vis oil. Wonder if this could cause short or long-term weakness in the dollar.
  • ma
    mary a.
    1 November 2017 @ 22:20
    Thanks, Raoul. I completely agree. Do you remember that Gross called the bottom in July 2013 too- players ran for the hills, Ahem! Question: couldn't lots of market belief in rising yields trigger an increase in VOL (equity and Bond)? when we have this short term spike. i.e., couldn't we have pandemonium in stocks etc even though the secular bull isn't really over? ML
  • vp
    vasilis p.
    1 November 2017 @ 22:09
    That's pure science.
  • EH
    Edwin H.
    1 November 2017 @ 22:05
    Truly a great think piece. I am in the camp bond yields will be going much lower, not higher. Interesting times ahead for sure!
  • SS
    Steven S.
    1 November 2017 @ 21:43
    Well timed piece Raoul - I was curious about your views now that we are seeing some USD strength. Pls continue keeping us up to date as the trend progresses.
  • DS
    David S.
    1 November 2017 @ 21:40
    Thanks Raoul for your presentation. It is possible to bet tactically against a current strategic trade. This is most interesting and shows the difference between the pros and everyone else. DLS
  • SR
    Steve R.
    1 November 2017 @ 20:52
    Ok, so what we have based on Julian B's view and Raoul's view is a possible trade opportunity to firstly, be short bonds as yields potentially spike higher on the back on strong pricing pressures (as per ISM readings), followed by a switch into being long bonds as the USD rises and suppresses yields. So based on this I would want to be potentially short bonds for the next few months and switch back to long bonds in Q1 2018 if USD strength persists?
  • PB
    Pieter B.
    1 November 2017 @ 20:51
    Great content Raoul! Thanks a lot and greetings from Malaga!
  • EL
    Elizabeth L.
    1 November 2017 @ 20:06
    Thank you Raoul for taking the time to give us this clear and thorough update on your dollar\bond view. Your inputs are one of the reasons I subscribe to RealVisionTV.