The Next Big Problem: A Plunge In Global Bond Demand

One year ago, just as the Fed had started quantitative tightening, i.e., the shrinkage of its balance sheet, JPMorgan’s Nikolaos Panigirtzoglou, author of the populst Flows and Liquidity newsletter predicted that the more than $1 trillion decline in G4 central bank bond purchases in 2018 relative to 2017 would be a key driver for the change in the overall supply/demand balance for government bonds, and result in broadly higher yields across the board. And sure enough, with the 10Y rising from 2.33% one year ago to a multi-year high of 3.24% earlier this month, as government bonds around the globe also saw a material pickup in yields, that prediction has been proven accurate.

Where JPM was wrong was in its estimates for matched pickup in non-central bank demand for government paper, where as Panigirtzoglou admits, he was overly optimistic (more on that shortly).