Paul Singer fund: Market 'breakdown' to be 'sudden, intense, and large'

In a bleak new letter to investors, Paul Singer's Elliott Management warns that the bond market is "broken" and that when the central bank actions of recent years no longer ward off a market downturn, the subsequent loss of confidence could be severe. The fund's recent investor letter, which covers the second quarter, notes that Elliott's managers are currently seeing "what is in many ways the most peculiar period we have faced in 39 years. " Too much power has been ceded to central banks, the letter adds, the value of money has been debased, inflation is probably inevitable, and when it happens, it could be swift and impossible to tamp down.

Given the persistence of low or negative yields on government and other bonds and the continued stampede to buy them nonetheless, today's environment marks "the biggest bond bubble in world history," and "the global bond market is broken," the investor letter states. In one wry aside, the letter suggests a safety warning be attached to the $12 trillion government bond market now trading at negative yields: "Hold such instruments at your own risk; danger of serious injury or death to your capital! " Trading in this market is particularly difficult, it adds. "Everyone is in the dark," Elliott notes. "Experience doesn't count for much, and extreme confidence may be fatal." Moreover, "the ultimate breakdown (or series of breakdowns) from this environment is likely to be surprising, sudden, intense, and large."