Debt Bomb

 Our early March commentary, “Watching the No 2’s,” showed a chart of 2-year Government bond yields for the US, the UK and for the Euro-Zone, reminding investors to, “forget the myth that central banks control interest rates, as the market does this job and sometimes with a vengeance, particularly when the market ends a long-term trend.” We could have added, “particularly when they have been so distorted.”

 Fast forward a short few weeks and the vengeance appears to have started to set into the more important 10-year lending rate, the rate to which most peoples mortgages are tied, as can be seen below:

 14 May 2015 Blog 1

More than $US 450BN has been wiped off the value of global bond markets since mid-April as yields jumped higher. Of the three shown above, Japan is leading with a 38% jump, which contrary to popular belief is deflationary, as the carry-cost of the enormous debt loads bear down on economic growth.

 Even more startling has been the reversal of the German 10-year bond yield, which briefly went negative before spiking by 830% as shown next:

14 May 2015 Blog 2

It also reminds of the relationship between bond yields and stocks, hence stocks will not fair very well in a secular bear market for bonds.

 A 2014 Mckinsey report, “Debt and Deleveraging,” confirmed that total Global debt has increased by 40% since 2007, to $US199,000,000,000,000 or $199 Trillion if that looks better and the cost of servicing it is starting to go through the roof. Furthermore, thanks to the their “not so smart” QE antics the Central Banks have cornered the Sovereign bond market, in fact they are the market, plus they own a fair amount of the junk MBS market, where yields will rise even higher.

 By mid-April nearly a third of the euro area’s $US6 trillion of government debt had yields below zero, which means that buyers of these bonds are guaranteed to lose money if they hold them to maturity. Furthermore, star hedge-fund manager, Stanley Drunkenmiller, observes that whereas in 2006/2007 28% of debt being issued was B-rated, today that figure has jumped to 71% of the debt that’s been issued over the past two years.

Tick tock, tick tock…you can almost hear the Boom approaching!





One response to this post.

  1. […] mid- May commentary, “Debt Bomb,” showed a chart of the important 10-year lending rate, the rate to which most peoples mortgages […]


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