2008 was a Global Financial Crisis driven by the private sector. 2022 is a Global Financial Crisis driven by the public sector. And that is infinitely worse.
Everything just changed. Bonds have been in a complete crash the last 3 weeks and no one is talking about it. To save the system, bonds must be saved, but this is not happening. The only way out is hyperinflation or defaulting to the Fed, neither are appealing options. We are on the verge of losing a whole generation to investing.
Disruption in the bond market is what can get the economy in trouble.
Policy makers are quickly lifting interest rates, and investors have held back, which has created a liquidity drought that’s led to historic swings in yields in recent months.
LONDON, Sept 23 (Reuters) – Global government bond losses are on course for the worst year since 1949 and investor sentiment has plummeted to its lowest since the financial crisis, BofA Global Research said in a note on Friday.
This year’s dramatic bond tumble threatens credit events and a potential liquidation of the world’s most crowded trades, including bets on the dollar that have taken the greenback to multi-year highs against other currencies and bets on U.S. technology stocks, the bank said.
FRANKFURT/WASHINGTON, Sept 22 (Reuters) – Global central banks continued raising interest rates on Thursday, following the U.S. Federal Reserve in a fight against inflation that is sending shockwaves through financial markets and the economy.
From CNN Business – But in 2022’s topsy-turvy economy, even that safe haven has become somewhat treacherous.
Bond returns, or yields, rise as their prices fall. Under normal market conditions, a rising yield should mean that there’s less demand for bonds because investors would rather put their money into higher-risk (and higher-reward) stocks.
Instead markets are plummeting, and investors are flocking out of risky stocks, but yields are going up.
Blame the Fed. Persistent inflation has led the Federal Reserve to fight back by aggressively hiking interest rates, and as a result the yields on US Treasury bonds have soared.
So while we’d normally see a rising 10-year yield as a signal that US investors have a rosy economic outlook, that isn’t the case this time. Gloomy investors are predicting more interest rate hikes and a higher chance of recession.
What it means: Portfolios are aching. Vanguard’s $514.5 billion Total Bond Market Index, the largest US bond fund, is down more than 15% so far this year. That puts it on track for its worst year since it was created in 1986. The iShares 20+ Year Treasury bond fund (TLT) (TLT) is down nearly 30% for the year.
Stock investors are also nervously eyeing Treasuries. High yields make it more expensive for companies to borrow money, and that extra cost could lower earnings expectations. Companies with significant debt levels may not be able to afford higher financing costs at all.
Main Street doesn’t get a break, either. An elevated 10-year Treasury return means more expensive loans on cars, credit cards and even student debt. It also means higher mortgage rates: The spike has already helped push the average rate for a 30-year mortgage above 6% for the first time since 2008.
Going deeper: Still, investors are more nervous about the immediate future than the longer term. That’s spurred an inverted yield curve – when interest rates on short-term bonds move higher than those on long-term bonds. The inverted yield curve is a particularly ominous warning sign that has correctly predicted almost every recession over the past 60 years.
Paul Plante says
An excellent and timely article that most likely will be ignored or poo-p00ed as unnecessary alarmism, because hey, everybody knows that this is America and in America we have the very best and the very brightest watching over these things and they will never let an economic crash happen, and besides I got to go shopping right now because there is another big party tonight and I need something fancy to wear, because it’s about the party, and I ain’t got time for this negativity which is such a real downer it’s not funny!
If EVERYBODY would just do the right thing and get some rose-colored glasses and look at the world that way, why, it is just such a beautiful, kind place where economic crashes simply don’t happen.
Paul Plante says
And in the meantime, so much for Elaine Luria’s outrageous lies about Joe Biden and his worthless pack of Democrats reducing our national debt, and when it is the “PRO JOE” New York Times commenting on it, you know we are in trouble, deep:
“New York Times report warns of rising debt, says it is a ‘political problem’ for Biden”
4 October 2022
The New York Times published an article Tuesday warning that the rising national debt, which just surpassed a historic $31 trillion, poses “a political problem” for President Biden and an economic problem for the United States as a whole.
The article, titled “U.S. National Debt Tops $31 Trillion for First Time”, briefly was featured as the New York Times’ front page story and was written by economic policy reporter Alan Rappeport and White House correspondent Jim Tankersley.
In the piece, Rappeport and Tankersley warned that rising interest rates will make it more expensive for the federal government to borrow money, a departure from the comparatively cheap money it has been able to obtain in recent years due to low interest rates and inflation.
“America’s gross national debt exceeded $31 trillion for the first time on Tuesday, a grim financial milestone that arrived just as the nation’s long-term fiscal picture has darkened amid rising interest rates,” The Times reported.
“The breach of the threshold, which was revealed in a Treasury Department report, comes at an inopportune moment, as historically low interest rates are being replaced with higher borrowing costs as the Federal Reserve tries to combat rapid inflation,” the article continued.
Higher interest rates make borrowing more expensive, including for the government, which sells various debt products to the public to finance its expenditures.
“Higher rates could add an additional $1 trillion to what the federal government spends on interest payments this decade, according to Peterson Foundation estimates,” the reporters wrote, noting “its borrowing costs rise and fall along with interest rates.”
They pointed to a report by the Congressional Budget Office published earlier this year which warned that mounting debt can cause investors to lose confidence in the U.S. government’s ability to pay back what it owes: “Those worries, the budget office said, could cause ‘interest rates to increase abruptly and inflation to spiral upward.’”
As for the political implications of the rising debt, The Times reporters wrote, “The $31 trillion threshold also poses a political problem for President Biden, who has pledged to put the United States on a more sustainable fiscal path and reduce federal budget deficits by $1 trillion over a decade.”
They noted The Committee for a Responsible Federal Budget estimates Biden’s spending has added $5 trillion to the deficit.
“That projection includes Mr. Biden’s signature $1.9 trillion economic stimulus bill, a variety of new congressionally approved spending initiatives and a student-loan debt forgiveness plan that is expected to cost taxpayers nearly $400 billion over 30 years,” The Times reported.