If yields on U.S. Treasury bonds keep rising, things are going to get very messy. What we are ultimately looking at is a sell-off very similar to 2008, only this time we will have to deal with rising interest rates at the same time. The conditions for a “perfect storm” are rapidly developing, and if something is not done we could eventually have a credit crunch unlike anything that we have ever seen before in modern times. Let me explain.
So states Michael Snyder (http://theeconomiccollapseblog.com) in edited excerpts from his original article* entitled If The Yield Goes Significantly Higher The Market Is Going To Freak Out.
[The following article is presented by Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com and www.munKNEE.com and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]
Snyder goes on to say in further edited excerpts:
As I write this, the yield on 10 year U.S. Treasuries has risen to 2.51 percent. If that keeps going up, it is going to be like a mile wide lawnmower blade devastating everything in its path. Ben Bernanke’s super low interest rate policies have systematically pushed investors into stocks and real estate over the past several years because there were few other places where they could get decent returns. As this trade unwinds…we are going to see unprecedented carnage. Stocks, ETFs, home prices and municipal bonds will all be devastated and, of course, that will only be the beginning.
At the moment, perhaps the most important number in the financial world is the yield on 10-year U.S. Treasuries. A lot of investors are really concerned about how rapidly it has been rising…[and if they continue to do so] it is going to have a dramatic effect throughout the economy. In an article that he just posted, Charles Hugh Smith explained some of the things that we might soon see:
“The wheels fall off the entire financialized debtocracy wagon once yields rise. There’s nothing mysterious about this:
- As interest rates/yields rise, all the existing bonds paying next to nothing plummet in market value.
- As mortgage rates rise, there’s nobody left who can afford Housing Bubble 2.0 prices, so home prices fall off a cliff.
- Once you can get 5+% yield on cash again, few people are willing to risk capital in the equities markets in the hopes that they can earn more than 5% yield before the next crash wipes out 40% of their equity.
- As asset classes decline, lenders are wary of loaning money against these assets; if the collateral for the loan (real estate, bonds, stocks, etc.) are in a waterfall decline, no sane lender will risk capital on a bet that the collateral will be sufficient to cover losses should the borrower default.
- In addition, rapidly rising interest rates would throw the municipal bond market into absolute chaos. In fact, according to Reuters, nearly 2 billion dollars worth of municipal bond sales were postponed on Thursday because of rising rates…
We are rapidly moving into unprecedented territory. Nobody is quite sure what comes next.
One financial professional says that municipal bond investors “are in for the shock of their lives. For the past 30 years there hasn’t been interest rate risk. That risk can be extreme. A one-point rise in the interest rate could cut 10 percent of the value of a municipal bond with a longer duration. Many retail buyers, though, are not ready for the change and when it starts, it will be too late for them to react.”
State Street said it would stop accepting cash redemption orders for municipal bond products from dealers. Tim Coyne, global head of ETF capital markets at State Street, said his company had contacted participants to say [that they]…were not going to do any cash redemptions today but that redemptions “in kind” were still taking place.
The ETF Market
Rising interest rates are playing havoc with other financial instruments as well. For example, it appears that the ETF market may already be broken…Citigroup stopped accepting orders to redeem underlying assets from ETF issuers, after one trading desk reached its allocated risk limits. One Citi trader emailed other market participants to say: “We are unable to take any more redemptions today . . . a very rare occurrence due to capital requirements we are maxed out on the amount of collateral we have out.”
These are the kinds of things that you would expect to see at the beginning of a financial panic, and when there is fear in the marketplace, credit can dry up really quickly. So, are we headed for a major liquidity crisis? Well, that is what Chris Martenson believes is happening:
“The early stage of any liquidity crisis is a mad dash for cash, especially by all of the leveraged speculators. Anything that can be sold is sold. As I scan the various markets, all I can find is selling. Stocks, commodities, and equities are all being shed at a rapid pace, and that’s the first clue that we are not experiencing sector rotation or other artful portfolio-dodging designed to move out of one asset class into another (say, from equities into bonds).”
The bursting of the bond bubble has the potential to plunge our financial system into a crisis that would be even worse than we experienced back in 2008.
Sadly, most Americans:
- have absolutely no idea how vulnerable the financial system is,
- have absolutely no idea that our system of finance is a house of cards built on a foundation of risk, debt and leverage,
- have complete and total faith that our leaders know what they are doing and are fully capable of keeping our financial system from collapsing [and, as such,] in the end,
- most Americans are going to be bitterly, bitterly disappointed.
[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
* http://theeconomiccollapseblog.com/archives/if-the-yield-goes-significantly-higher-the-market-is-going-to-freak-out (Copyright © 2013 The Economic Collapse)
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