Even before the Federal Reserve actually raises interest rates—assuming that they will in fact do so as they have stated, which is by no means a given—mere talk by the Fed of coming rate increases is already starting to ripple through the markets, domestically and internationally. This is going to lead to a contagious wave of bankruptcies in all financial sectors, which will in turn impact the mammoth $1.7 quadrillion speculative derivatives bubble.
In the U.S., two-year Treasury notes broke 1% in the last auction, for the first time since February 2020. “The bond market is continuing to price in a more aggressive policy tightening by Federal Reserve based on still-high inflation and the Fed’s more hawkish guidance,” Kathy Bostjancic, the chief U.S. financial market economist at Oxford Economics told CNBC. Mortgage rates have also begun to rise, with 30-year, fixed-rate mortgage climbing to 3.64% in the week ended Jan. 14, from 3.52% a week earlier, the Mortgage Bankers Association stated Jan. 19. Reuters ascribes this to the fact that “financial markets anticipate that the Federal Reserve will raise rates sooner and faster than previously expected to combat inflation.”
But the international debt bubble may be the one that is hit first and hardest by climbing interest rates. The World Bank last week published a report warning that there could be a wave of “disorderly defaults” among low-income countries, as interest rates rise, pandemic-relief comes to an end, and suspended debt payment plans expire, according to a lengthy report in the Jan. 17 Financial Times. The World Bank says that a group of 74 such countries will have to repay $35 billion to official bilateral and private-sector lenders in 2022 (up 45% from 2020), and that Sri Lanka is one of the most vulnerable cases that is already teetering at the edge of default. Ghana, El Salvador and Tunisia, are among others on the watch list.
