By Brian Price
One of the most crowded trades on Wall Street is about to implode, says one market watcher.
“We’re in an epic bubble of colossal proportions,” Peter Boockvar, managing director and chief market analyst at The Lindsey Group, said Tuesday on CNBC ‘s “ Futures Now ” in reference to the fixed income market.
Global yields have been tumbling to record lows, with many dipping into negative territory. The U.S. 10-year (U.S.: US10Y) hit its lowest level ever this week as traders continue to seek safety in the bond market. Yields move inversely to prices.
However, Boockvar believes that this activity is a ticking time bomb for the global economy. He reasoned that U.S. Treasury yields are being dragged down by negative-yielding debt out of Germany, Japan and Switzerland and misplaced monetary policy, and is therefore skeptical as to how much longer the rally can continue.
“It could be central banks that end this,” said Boockvar in regard to upward momentum for bonds. In his recent coverage, he reacted to the newly released FOMC minutes and further questioned the Fed’s ability to act effectively.
“They’ll call it being ‘patient.’ Their forecasts are now irrelevant, their communication is now meaningless and their tools to handle whatever might come our way are toothless,” noted Boockvar when describing the Fed’s ability to address a flattening yield curve.
In Europe, concern for Italy’s economy continues to rise as that nation struggles to maintain negative interest rates while simultaneously raising capital for its banking system, which is straddled with mounting debt.
“Maybe Italian banks are telling us that central bankers and their negative interest rate policies are actually destroying the Japanese and European banking system?” asked Boockvar in the CNBC interview.
He reasoned that Bank of Japan Governor Haruhiko Kuroda and European Central Bank President Mario Draghi could take a look at what’s happening in Italy and decide that their respective monetary policies are the wrong course of action. Ultimately, Boockvar warned of the fallout that could occur if multiple nations opt to end what he referred to as a “negative deposit rate regime.”
“Even if they put it back to zero, imagine the carnage, at least in the short-term bond markets,” concluded Boockvar.