We are nearing an inflexion point in the bond market, and the outcome could determine where stocks and the economy head next.
All eyes are on the apex of the bond market; treasuries, particularly long-duration treasuries, those with a maturity date of 10 years or more, are particularly sensitive to interest rates.
Long-maturity treasury yields are a yardstick for financing long-term loans.
Creditors refer to long-duration treasuries, particularly the 10 and 20-year treasuries that determine loan rates.
When treasury yields rise, the cost of servicing debt increases.
So, variable rate mortgages and car loans become more costly for households to service in a rising yields environment.
Commercial properties and business loans also become more costly for businesses to service.
So, the higher treasury yields go, the greater the credit squeeze, which dampens consumption and investments in the economy.
“We are nearing an inflexion point in the bond market, and the outcome could determine where stocks and the economy head next”
As an inflexion point in the bond market plays out, the fallout of higher yields is visible
Delinquencies on auto loans, credit cards and consumer loans are at their highest levels in a decade, and they could go even higher.
“The increase in delinquencies and defaults is symptomatic of the tough decisions that these households are having to make right now — whether to pay their credit card bills, their rent or buy groceries,” said Mark Zandi, chief economist at Moody’s Analytics.
Former Fed chair and now US Secretary, Janet Yellen said last week that yield surge is due to a strong economy and not deficits
So why are we not seeing capital flows into stocks, bearing in mind the NASDAQ and the S&P are both in correction territory as we wrote this piece? Why are household delinquencies and bankruptcies at levels not seen during the 2008 financial crisis?
The only logical explanation for a rise in GDP is due to the war economy, as billions of dollars are created, to finance the replenishing of depleted stocks and war materials.
“The increase in delinquencies and defaults is symptomatic of the tough decisions that these households are having to make right now — whether to pay their credit card bills, their rent or buy groceries”
MARK ZANDI, Moody’s Analytics
A multi-front war on two continents means an expansionary budget deficit will continue.
Fiscal spending to finance the escalating wars in the Middle East and Europe means the public deficit, which is already at 32 trillion USD, could go much higher.
The Ukrainian war to expel Russian forces is over 18 months old, with estimates of around half a million dead soldiers and many more injured.
The US and its allies have crossed many of Russia’s redlines, sending tanks, fighter jets and Uranium depleted ammunition which is contaminating Europe’s breadbasket and is likely to cause the worst global food shortages, a modern-day Holodomor where millions starve to death.
To make matters worse just as there are too few Ukrainians of fighting age left standing to fight a decision has been made to send long-range missiles to Ukraine. In other words, the US and its allies are supplying weapons that can attack deep inside Russia, which is an act of war.
“It is almost as if the puppet masters are deliberately kicking the hornets to ignite WW3. Perhaps the Israelis and the Ukrainians are being baited for war” – Win Investing
NATO has declared war on Russia. How many more Russian redlines are going to be crossed until the nukes start flying?
The Israel Hamas war is a powder Keg where the Kaza strip is a low-tech killing field with over 40 per cent of densely populated urban areas in rubble, just the kind of war Israel and America hate to fight. Urban gorilla fighting with boots and guns on the ground where survival means shooting anything that moves.
There is talk of 8,000 casualties, with over half being women and children. It is a humanitarian disaster that could potentially ignite a new Crusade.
It is almost as if the puppet masters are deliberately kicking the hornets to ignite WW3. Perhaps the Israelis and the Ukrainians are being baited for war.
War, rising public deficits and the inflexion point in the treasuries market
When a hegemon is unable to maintain its dominant position through trade, finance and sanctions, then we see hard power projected.
The movement of military assets to the Middle East, and billions of dollars of weapons to fight Russia is an example of an Empire projecting military power to enforce the rules of the game, rules made to keep USD on the throne.
But this period of world disorder means that the oppressed are rising and willing to challenge the US hegemony on the battlefield.
“WW3 is a superpower struggling for the throne, the world reserve currency” – Win Investing
The US claims it can fight a multi-front war, and its rivals are calling its bluff.
Think of a jungle where a young lion is eyeing up the old fumbling lion of the pride and thinking, why do I need to submit to the old lion’s rules, for I can fight and beat the old lion and become king of the pride.
WW3 is a superpower struggling for the throne, the world reserve currency.
In financial terms, a multi-front war means this imbalance of supply and demand in the treasury market could worsen., bearing in mind public spending is primarily financed with the issuing of debt monetized as treasuries. Put simply, Monetary Policy 3 MP3 finances WW3.
Nearing an inflexion point, bond vigilantes versus the war hakes and bond bulls
Bond Vigilantes is a bond market investor who protests against monetary or fiscal policies considered inflationary by selling bonds, thus increasing yields.
But the buy the dip treasury market crowd, the war hawks believe that war is good for safe-haven assets, treasuries
The old saying; buy on the sounds of gunfire made sense when nothing came close to US hegemony forty years ago.
But Russia today is not the former fragmented USSR broken economy, and China is not a peasant economy. Moreover, India is rising.
What if the West is no longer the best, and the US and its allies get a bloody nose in this coming war? The battle lines are drawn, countries are getting onside, and some will remain neutral.
But if the hegemon loses the fight, those yields are not attractive at 20% or 40%.
The animals in the jungle investors are becoming restless, and hiding in an alternative safe haven could be a wise hedge.