The headlines alone in the leading financial media this weekend give you an idea of the level of panic surging to the surface in the City of London and Wall Street, as their “everything bubble” threatens to blow out everywhere at once. “Why Britain is on the verge of a Cataclysmic Financial Crisis” (The Telegraph, Oct. 8); “Mincing Machine of the Bond Markets Has Spread the Pain Wide” (Financial Times, Oct. 8); “Rising Bond Yields Are Exposing Fiscal Fantasy in Europe” (The Economist, Oct. 4); and “Rising Debt Burden Raises Fears for Financial Health of American Households” (Financial Times, Oct. 8).
The last of these articles gets closest to staring into the eye of the hurricane: The fact that the policies of the Fed itself have led to the predatory hedge funds taking over the $25 trillion U.S. Treasury market, the benchmark for all bond markets globally.
Author Katie Martina wrote: “The message is finally sinking in that rates are staying high and central banks do not intend to reverse course. Global bond markets have been through a mincing machine in the past few weeks, inflicting pain on everyone from retail investors to insurance companies.” She presents a couple of possible explanations, including that “we are at the foothills of a catastrophic reckoning with the fiscal incontinence and addiction to low rates that had taken hold over the previous few decades, and we should brace for a serious challenge to the global dominance of the dollar and U.S. government bonds’ centrality in financial markets. This will not blow over soon.”
She added: “Government bond prices have been under pressure all year as rates have cranked higher, but recently something snapped. At the start of this week, yields on benchmark 10- and 30-year U.S. government bonds vaulted to the highest levels since 2007, with some volatile intraday shifts. ‘If Tuesday was market chaos, Wednesday was chaos on a trampoline on drugs,’ wrote Rabobank’s Michael Every. ‘This is the primus inter pares of global bond markets which everyone everywhere in the world has to look to for the cost of borrowing, and it’s trading like a penny stock’.… The combination of nauseating volatility, sinking bond valuations and sky-high benchmark borrowing costs is stirring concerns over corporate defaults and shaky sectors such as U.S. regional banks and commercial real estate.”
Martina sees no light at the end of the tunnel. “Broadly, the message is at last sinking in that rates are staying high for a good while yet, and may go higher still. Central banks do not intend to reverse course.”
The Economist article “Rising Bond Yields Are Exposing Fiscal Fantasy in Europe” pointed to the same problem all over the trans-Atlantic sector. “America’s ten-year Treasury yields, at about 4.7%, are at their highest since 2007. The Bank of Japan has ramped up its bond purchases to maintain its cap on yields. In Europe on Oct. 4th the yield on ten-year German Bunds crossed 3% for the first time in more than a decade. Those on Italian debt are nearly 5%—the highest since the tail-end of the eurozone’s sovereign-debt crisis in 2012…. Investors fear markets are in for a turbulent time.”
