The threat posed by bonds to the global financial system
The worst bear market in a century is unleashing huge strain on parts of the financial system
In 1994, James Carville, then an aide to President Clinton, made the famous observation that he'd like to be reincarnated as the bond market – because then "you can intimidate everybody".
Carville's quip is arguably "truer now than ever", said William Pesek on Forbes. With US national debt now topping $33trn, the "bond vigilantes" so feared by the Clinton White House are back – "bidding US bond yields up to their highest levels in nearly two decades", and causing a global "repricing of assets". Higher yields on sovereign bonds are a big worry for indebted governments facing punishing interest payments.
But since bond prices are also plunging (they go down as yields go up), the pain is being felt across the financial system, said the Financial Times. Paper losses on "the most opaque part of US banks' bond portfolios are now close to $400bn – an all-time high". And jitters are rampant. "We are watching this very carefully", said Salman Ahmed of Fidelity International, "to see if something breaks."
Subscribe to The Week
Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.
Sign up for The Week's Free Newsletters
From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.
From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.
Two theories
"Strategists at Bank of America reckon the US has never seen a bond bear market like this one, going all the way back to its founding," said John Stepek on Bloomberg. That's a staggering statistic. "If losses of a scale not seen in over a century were happening in equity markets, it would be all over the front pages."
Alarmingly, said Katie Martin in the FT, it is not obvious why this massive rout is happening. "Theory one" is that "the supposedly big brains of the investment world have been spectacularly wrong-footed" by the central bank view that interest rates will be "higher for longer" – and are scrambling to catch up. This suggests that "something had to give", but that it will "all balance out and blow over soon".
The more worrying "theory two" is that "we are at the foothills of a catastrophic reckoning with the fiscal incontinence and addiction to low rates" of recent decades. If so, it won't blow over soon; "we should brace for a serious challenge" to the global dominance of the dollar and US Treasuries.
'Financial accidents'
The panic is about fiscal policy, too, said Mehreen Khan in The Times. "Bond vigilantes" are "throwing a tantrum" about the explosion in debt supply, hoping to "force a fiscal straitjacket onto profligate governments". But the size of the US debt market means it won't be "bullied into submission". That's why the volatility is so dangerous.
After the mini-Budget, it wasn't Liz Truss's fiscal black hole that doomed her premiership, "but the near-collapse of some pension funds caught on the wrong side of the surge in 30-year gilt yields".
Vigilantes are unlikely to force a US fiscal U-turn, "but their actions are liable to cause financial accidents".
Sign up for Today's Best Articles in your inbox
A free daily email with the biggest news stories of the day – and the best features from TheWeek.com
-
When will mortgage rates finally start coming down?
The Explainer Much to potential homebuyers' chagrin, mortgage rates are still elevated
By Becca Stanek, The Week US Published
-
Women are getting their own baseball league again
In the Spotlight The league is on track to debut in 2026
By Justin Klawans, The Week US Published
-
Giant TVs are becoming the next big retail commodity
Under the Radar Some manufacturers are introducing TVs over 8 feet long
By Justin Klawans, The Week US Published
-
Funeral in Berlin: Scholz pulls the plug on his coalition
Talking Point In the midst of Germany's economic crisis, the 'traffic-light' coalition comes to a 'ignoble end'
By The Week UK Published
-
The teenage 'maths prodigy' who turned out to be a cheat
Under The Radar Jiang Ping defied expectations in a global competition but something wasn't right
By Chas Newkey-Burden, The Week UK Published
-
Ivory Coast reels from surge of homophobic attacks fuelled by online influencers
Under the Radar Once considered a safe haven, West African nation's LGBTQ+ citizens says they are now afraid to be seen in public
By Tess Foley-Cox Published
-
Israel attacks Iran: a 'limited' retaliation
Talking Point Iran's humiliated leaders must decide how to respond to Netanyahu's measured strike
By The Week UK Published
-
Has the Taliban banned women from speaking?
Today's Big Question 'Rambling' message about 'bizarre' restriction joins series of recent decrees that amount to silencing of Afghanistan's women
By Harriet Marsden, The Week UK Published
-
Cuba's energy crisis
The Explainer Already beset by a host of issues, the island nation is struggling with nationwide blackouts
By Rebekah Evans, The Week UK Published
-
Did the Covid virus leak from a lab?
The Explainer Once dismissed as a conspiracy theory, the idea that Covid-19 originated in a virology lab in Wuhan now has many adherents
By The Week UK Published
-
Exodus: the desperate rush to get out of Lebanon
Talking Point As the Israel-Hezbollah conflict escalates Lebanon faces an 'unprecedented' refugee crisis
By The Week UK Published