By Dev Chandrasekhar
The collapse of the US bond market is threatening to send the global economy into a tailspin Neither a singular event nor a sudden fall, the current crash is an ongoing catastrophe, a continuous descent into an economic abyss.
The 10-year US bonds chart shows a harrowing tale of a bond collapse that is among the worst in 150 years. Investors who entrusted their funds to 10-year Treasuries since 2020 have seen a 46% loss; investors in 30-year bonds have suffered a 53% depreciation. On 23 October, yields on 10-year US Treasury notes topped 5% for the first time since 2007.
A straightforward explanation
The US Federal Reserve, once a bastion of stability, has ceased raising rates since July, yet bond yields continue their relentless climb. The reason behind this disconcerting phenomenon is straightforward: the supply of Treasury bonds far exceeds the demand for US debt. Large investors are rapidly divesting their US holdings, while Treasury Secretary Janet Yellen keeps flooding the market with bonds to fuel the insatiable needs of the US government. Making more bonds available than there are people willing to buy them is like having too many cookies and not enough hungry friends to eat them!
Second, major investors are selling off their holdings of US government bonds. These investors include powerful countries such as China, which has lost confidence in the ability of the US government to repay its debts. The Chinese government’s decision not to reinvest its holdings of US securities signals a seismic shift in global economics and reflects more than economic pragmatism; it stems from profound distrust in the US government as a reliable counterpart.
The US Fed is in no man’s land
The era of low interest rates is now a distant memory. The Federal Reserve finds itself ensnared; they cannot lower rates further due to rampant inflation. Strikingly, even Federal Reserve officials have publicly declared their decision not to intervene. They stand by, watching unmoved as the bond market hurtles towards an abyss. Rising bonds, though destructive to the economy, seem to be the objective of the power elite in the US, a design to annihilate demand and usher in an era of financial apocalypse.
Worse, amidst this chaos, a new breed of bond buyers has emerged. Hedge funds, insurance companies, money market funds, and speculators have entered the market in droves, driven by a keen sensitivity to bond prices. Their entry disrupts traditional dynamics, leaving institutional buyers teetering on the edge.
The new breed of buyers has driven up the prices of bonds. This has left traditional buyers like commercial banks and the Federal Reserve facing higher costs and lower collateral values. As a result, they may be forced to reduce their purchases of bonds, which could lead to a further rise in bond prices and increased volatility in the bond market.
The US’s insatiable hunger for “global causes”
US President Biden’s request for a staggering $105 billion in aid for Ukraine, Israel, Taiwan and border security adds fuel to the fire of an already dire economic situation. While the Federal Reserve is unable to print more money due to soaring inflation, Treasury Secretary Janet Yellen is left with no choice but to flood the market with more bonds–causing stocks to plummet and borrowing costs to skyrocket.
The crisis in the United States has worldwide implications. The US Treasury, serving as the world’s benchmark rate, significantly influences global interest rates. As the bond market hurtles toward its nadir, borrowing costs surge worldwide and potentially trigger a synchronized global economic slowdown.
How much more can the bond market endure? Will President Biden’s borrowing spree persist, further testing the market’s resilience? The global economy teeters on the edge of a financial precipice. As events unfold, India and the world will have to brace for impact as an economic tidal wave hits us all.
(Dev Chandrasekhar advises corporates on the “big picture”. The views expressed are personal opinion of the author.)