Macroscope | Bond boom a sign of reality catching up with bubbly stock markets

Bond mania seems to have taken hold everywhere – from China and Japan to the US, the UK and Europe – while stocks stagger from last month’s “flash crash” and recovery to a new mini crash. The implications of all this for the future of capital markets are very interesting.

The bond issuance boom has to do partly with anxiety among everyone, from governments and business corporations to private investors. They are locking in funds ahead of looming global conflicts, the US presidential election, interest rate and inflation uncertainty, and so on.

However, recent bond market fervour also carries a more profound message: because of stocks’ recent skittishness and unnerving behaviour, the confidence of the global investment community and the savers it is supposed to serve is being eroded, undermining the notion that equity markets are best placed to meet massive capital demands.

We have grown used to living with a financial system that is guilty of misdirecting investment into popular and sometimes wasteful areas of the economy. It seems that equity markets are facing a comeuppance now as stock prices tremble on the brink of another slide while bond markets are seeing all the action.

Everywhere from the emerging markets of Asia to the mighty stock markets of Wall Street, London and other leading capitals, the so-called cult of equity has long held sway, driving stock prices to often absurd levels. That is, at least, until they began to be toppled in August.

If the wave of financial liquidity that has flowed into stock markets in recent years is now beginning to wash out of shares and into bonds, as appears to be the case, there is some hope of a more rational approach to solving existential problems such as climate change, health challenges and renewing infrastructure.