Wake up Ben Bernanke has lost control of US interest rates!
The US bond market has quietly slipped into a worse slump than in the Armageddon year of 1994 with bond yields up 40 per cent on benchmark T-bonds since the start of May.
Bond prices move in the reverse direction to yields, so that means US bonds have entered a massive bear market. It matters not very much what Fed chairman Ben Bernanke does or does not telegraph to the markets, they have stopped listening and US interest rates are firmly on the way up.
The reality ahead is a looming plunge into the abyss for financial markets in a repeat of 2008-9. Nobody should expect a smooth rotation from bonds to stocks. Moving to cash or precious metals never made more sense.
THE US FINANCIAL SYSTEM: ON THE BRINK
Most people have no idea that the U.S. financial system is on the brink of utter disaster. If interest rates continue to rise rapidly, the U.S. economy is going to be facing an economic crisis far greater than the one that erupted back in 2008. At this point, the economic paradigm that the Federal Reserve has constructed only works if interest rates remain super low. If they rise, everything falls apart. Much higher interest rates would mean crippling interest payments on the national debt, much higher borrowing costs for state and local governments, trillions of dollars of losses for bond investors, another devastating real estate crash, and the possibility of a multi-trillion dollar derivatives meltdown.
Everything depends on interest rates staying low. Unfortunately for the Fed, it only has a certain amount of control over long-term interest rates, and that control appears to be slipping. The yield on 10 year U.S. Treasuries has soared in recent weeks. So have mortgage rates. Fortunately, rates have leveled off for the moment, but if they resume their upward march we could be dealing with a nightmare scenario very, very quickly.
In particular, the yield on 10 year U.S. Treasuries is a very important number to watch. So much else in our financial system depends on that number as CNN recently explained…
Indeed, since May, just before Bernanke announced a probable end to QE3, the yield on 10-year Treasuries has jumped around almost one percentage point, to 2.6%, wiping out more than two years of interest payments. The markets clearly fear that far higher long-term rates are lurking in the absence of exceptional policies to rein them in.
That’s a crucial issue, because those rates are highly influential in determining the future performance of stocks, bonds, and real estate. Investors grant equities higher multiples when long-term rates are lower; both longer-maturity Treasuries and corporate bonds jump when rates decline; and developers pocket more cash flow from their projects when they borrow cheaply, raising the values of office and apartment buildings. When rates reverse course, so do all of those prices the Fed has been endeavoring to swell as a tonic for the economy.
Mauldin – The Fed Is Creating Enormous Financial Instability
Today John Mauldin warned King World News that the U. S. Federal Reserve is creating enormous instability in the global financial system. Mauldin, who is President of Millennium Wave Securities, also cautioned that if things spin out of control, “the central bank doesn’t have any weapons.”
Mauldin: “I’ve been doing a lot of thinking about the future. I’m in the process of finishing up a book with the co-author of ‘End Game.’ We have a book coming out this fall called, ‘Code Red.’
We are writing about quantitative easing, currency wars, and the next 5 years. The upshot of it is that our current policies in both governments, and in central banking, are coming to a point that it’s (actually) increasing the instability of the system….