“Looking ahead in 1994, bond yields surged another +100 [basis points] in the next 3.5 months,” writes Hyman. “Of course, the huge difference is that in 1994 fed funds were hiked +75bp during this period, and another +175bp by the end of the year.”
Needless to say, the situation in 2013 is drastically different from that in 1994.
“In sharp contrast, this year, there is no chance of a fed funds hike, and even with tapering, the Fed’s balance sheet will increase another +$450b, which could be viewed as equivalent to cutting the fed funds rate by roughly -50bp,” says Hyman.
Controlling The Implosion Of The Biggest Bond Bubble In History
Andy Haldane, Director of Financial Stability at the Bank of England, put it this way: “We’ve intentionally blown the biggest government bond bubble in history.” The bursting of that bubble was now a risk he felt “acutely,” and he saw “a disorderly reversion” of yields as the “biggest risk to global financial stability” [my take... Biggest Bond Bubble In History Is Turning Into Carnage].
Preventing that “disorderly reversion” of yields is the Fed’s job, in the eyes of Stumpf, Blankfein, Haldane, and all the others. The Fed should let the air out gradually to bring yields back to “normal.” So the Fed hasn’t actually changed course yet. It’s keeping short-term rates at near zero, and it’s still buying bonds. But it has started to talk about changing course – and the hissing sound from the deflating bond bubble has become deafening.
Long-term Treasuries went into a tailspin. The 10-year note had the worst week since June 2009, the days of the Financial Crisis; yields jumped 39 basis points (13 bps on Friday alone), to 2.55%. Up from 1.66% on May 2. And almost double from the silly 1.3% that it briefly bushed last August.
If entire global stock of gold went to $0 the losses would not equal the losses in the global bond market last week.
The Ripple Effect cannot be good from this!
BOND MARKETS IN FREFALL….CURRENTLY AT 2011 LEVEL
Deutsche Bank – If The Fed Is Concerned About Popping Its Asset Bubbles, It Is 15 Years Too Late
… proves that an actual exit by the Fed and the world’s central banks is now impossible, & that the “discounting” market as described in Finance 101 textbooks, is now long dead.
The Trigger Has Been Pulled And The Slaughter Of The Bonds Has Begun
Over the last several years, reckless bond buying by the Federal Reserve has forced yields down to absolutely ridiculous levels. For example, it simply is not rational to lend the U.S. government money at less than 3 percent when the real rate of inflation is somewhere up around 8 to 10 percent. But when he originally announced the quantitative easing program, Federal Reserve Chairman Ben Bernanke said that he intended to force interest rates to go down, and lots of bond investors made a lot of money riding the bubble that Bernanke created. But now that Bernanke has indicated that the bond buying will be coming to an end, investors are going into panic mode and the bond bubble is starting to burst. One hedge fund executive told CNBC that the “feeling you are getting out there is that people are selling first and asking questions later”. And the yield on 10 year U.S. Treasuries just keeps going up. Today it closed at 2.59 percent, and many believe that it is going to go much higher unless the Fed intervenes. If the Fed does not intervene and allows the bubble that it has created to burst, we are going to see unprecedented carnage.
Markets tend to fall faster than they rise. And now that Bernanke has triggered a sell-off in bonds, things are moving much faster than just about anyone anticipated…
Wall Street never thought it would be this bad.
Over the last two months, and particularly over the last two weeks, investors have been exiting their bond investments with unexpected ferocity, moves that continued through Monday.
A bond sell-off has been anticipated for years, given the long run of popularity that corporate and government bonds have enjoyed. But most strategists expected that investors would slowly transfer out of bonds, allowing interest rates to slowly drift up.
Instead, since the Federal Reserve chairman, Ben S. Bernanke, recently suggested that the strength of the economic recovery might allow the Fed to slow down its bond-buying program, waves of selling have convulsed the markets.