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."
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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".
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