BIS: Rising Bond Yields Risk Debt Spiral in US, Japan
Major economies risk ballooning debt loads unless their growth can keep pace with increases in borrowing costs as spending on the elderly rises, according to the Bank for International Settlements.
Japan’s public debt would swell to 600 percent of gross domestic product by 2050 on a 2 percentage-point increase in funding costs, should its age-related government spending continue unchecked, the Basel-based BIS said in its 83rd annual report. In the U.S., the debt-to-GDP ratio would almost double to 200 percent under the same circumstances, it said.
“Governments in several major economies currently benefit from historically low funding costs,” the BIS said. “At the same time, rising debt levels have increased their exposure to higher interest rates. The consolidation needs of countries experiencing low interest rates would be greater if their growth-adjusted interest rates were to rise.”
Bond yields around the world jumped last week after Federal Reserve Chairman Ben S. Bernanke said on June 19 that the central bank may begin dialing down its bond purchases this year and end them in mid-2014. That signals higher borrowing costs for governments as the recovery in the U.S. gathers momentum.
Treasury 10-year note yields rose past 2.5 percent for the first time in almost two years on June 21, having climbed from a record low of 1.379 percent set on July 25, 2012. The average yield to maturity on the more-than-20,000 securities in the Bank of America Merrill Lynch Global Broad Market Index rose to 2.03 percent on June 20, the highest since April 26, 2012.
US bond yields eye biggest weekly rise in 10 years
Treasury Yields Spike To New 14 Month Highs
Chinese Sovereign Risk Spikes Most Since Lehman
Financial Stress Index Hits Scary Level
Instead of going into the details about how the index is composed, I’ll let you click through to the St. Louis Fed’s explanation here.
The last three times that we’ve seen spikes like this were during the U.S. financial crisis of 2008, during the acceleration of the Greek crisis in May 2010 and in August 2011, when the U.S. credit rating was downgraded by S&P.
Yields Creep Up in Spain, Italy, France (Actual and Also Relative to Germany)
Curve Watchers Anonymous has its eye on global interest rates that are heading North practically everywhere.
Spain 10-Year Bond Yields
After hitting a low of just above 4% earlier this year, the yield is now back above 5%.
Italy 10-Year Bond Yields
After falling as low as 4.68% today, the yield close up slightly at 4.86%. The April low was 3.76%.
Germany 10-Year Bond Yields
The yield on the Germany 10-Year government bond is 1.80, up from a year-low of 1.17%.
Thus sovereign rates are up 63 basis points in Germany, but over 100 basis points (a full percentage point) in Spain and Italy.
France 10-Year Bond Yields
Central Banks Told To Head For Exit, ABANDON GLOBAL RECOVERY!
Canadian dollar declines amid higher U.S. bond yields, central bank concerns
Not just China… New report suggests the euro crisis is popping up again
Mediobanca, Italy’s second biggest bank, said its “index of solvency risk” for Italy was already flashing warning signs as the worldwide bond rout continued into a second week, pushing up borrowing costs.
“Time is running out fast,” said Mediobanca’s top analyst, Antonio Guglielmi, in a confidential client note. “The Italian macro situation has not improved over the last quarter, rather the contrary. Some 160 large corporates in Italy are now in special crisis administration.”
The report warned that Italy will “inevitably end up in an EU bailout request” over the next six months, unless it can count on low borrowing costs and a broader recovery.
Emphasising the gravity of the situation, it compared the crisis with…
The 441 TRILLION Dollar Interest Rate Derivatives Time Bomb
Do you want to know the primary reason why rapidly rising interest rates could take down the entire global financial system? Most people might think that it would be because the U.S. government would have to pay much more interest on the national debt. And yes, if the average rate of interest on U.S. government debt rose to just 6 percent (and it has actually been much higher in the past), the federal government would be paying out about a trillion dollars a year just in interest on the national debt. But that isn’t it. Nor does the primary reason have to do with the fact that rapidly rising interest rates would impose massive losses on bond investors. At this point, it is being projected that if U.S. bond yields rise by an average of 3 percentage points, it will cause investors to lose a trillion dollars. Yes, that is a 1 with 12 zeroes after it ($1,000,000,000,000). But that is not the number one danger posed by rapidly rising interest rates either. Rather, the number one reason why rapidly rising interest rates could cause the entire global financial system to crash is because there are more than 441 TRILLION dollars worth of interest rate derivatives sitting out there. This number comes directly from the Bank for International Settlements - the central bank of central banks. In other words, more than $441,000,000,000,000 has been bet on the movement of interest rates. Normally these bets do not cause a major problem because rates tend to move very slowly and the system stays balanced. But now rates are starting to skyrocket, and the sophisticated financial models used by derivatives traders do not account for this kind of movement.