Four percent 10-year rates and a UK pivot back to QE lit a fire under the markets today …
As always it started with bonds and interest rates have been on a wild ride … Check out today’s move along the yield curve …
The 5-year had the most significant drop today at 27.5 basis points (.01% per) … Also notice the change in the slope of the yield curve …
The 30-year bond only dropped 17 basis points so that signals that investors are betting the Fed tightens less than had been forecast.
The following month of economic numbers will reaffirm that the Fed will have to pull a similar move to the Bank of England (BOE) and start printing money again.
As a matter of fact, the US is in a much more precarious position than the UK …
Today we will take a look at why …
I have been saying for months that the Fed would stop tightening by the end of the third quarter of 2022 …
Well, that is now 2-days away and I still believe the Fed is finished tightening. Notice the chart below showing the dramatic move higher in rates.
Now, a move in interest rates like this that happens in such a short period of time will take some time to feed through to the economic data …
The other major macro force is foreign holders of US bonds that need liquidity and may choose to sell a portion of the $7.5 trillion in Treasury bonds they own. Check out this list below …
Japan, China, and the UK, the three largest holders are getting crushed as the dollar rises because they import oil and are still settling their oil purchases in US dollars …
This is slowly changing as Russia signs agreements to settle the oil they export in local currencies.
This selling of US bonds to diversify into alternative energy settlement solutions will pressure the bond market …
But wait there's more … Foreigners also own a net $18 trillion in US dollar assets. Now that dollar strength has become a national security threat due to dollar-settled energy, those foreigners will likely sell a portion of their US assets.
Here are a couple of headlines to this point from last week …
- Chinese firms flee US commercial real estate after big property bets sour (WSJ)
- Japanese bonds face liquidity stress as BOJ walks loney rates path (Bloomberg)
The bottom line is – Energy deficits as a result of Russian energy sanctions are pushing Japan, the EU, and the UK into current account deficits that they must finance by either:
- Printing money to finance deficits, while capping yields (runs the risk of runaway inflation)
- Selling US dollar assets to finance energy-driven deficits (we are just beginning this phase)
- Agreeing with Russia to buy energy in local currency and settling energy deficits in gold that floats in all currencies
Bring It Home
There are very tough choices ahead and my bet is on #1 because that is what politicians will choose.
The problem with it is citizens lose confidence in the government and the currency loses all of its value over time.
It has happened many times in the past and eventually the government pays off the debt at like $.30 on the dollar and starts over.
To understand what happens to the markets in this scenario stay tuned to Power Income because massive new trends may be just around the corner … Have a good night and as always …
Live and Trade With Passion My Friend,
Griff