Bond Panic Spreads, by Bill Bonner

The bond market, having topped in July, 2016, is leading the stock market, which may have topped last month. Bonds usually lead stocks. Higher interest rates will certainly not help the economy. From Bill Bonner at bonnerandpartners.com:

CORK, IRELAND – “U.S. Stocks Drop as Treasury Sell-Off Gains Steam,” was headline news at Bloomberg yesterday.

Meanwhile, bitcoin tumbled toward $8,000, wiping about $100 billion off its market value in just 24 hours.

And the price of the 10-year Treasury note dived, driving up its yield to above the 2.75% mark.

Already, the 30-year fixed mortgage rate – which gets its cue from the 10-year T-note yield – has jumped from 3.7% a year ago to 4.2% today.

On a $200,000 mortgage, that comes to about the same amount as the savings promised in the tax cut.

World of Hurt

The feds giveth; the feds taketh away…

…and the feds maketh a mess of things.

They have engineered a grotesquely exaggerated credit cycle – holding short-term interest rates below the rate of inflation for far too long.

They’ve been giving out free money, in other words.

Now they have an economy burdened by far too much debt… just as the credit cycle turns.

A few basis points doesn’t seem like much. But when you have to borrow, every extra basis point (one one-hundredth of a percentage point) hurts. And when you have $67 trillion in debt, a few basis points can be a disaster.

To be more precise, a one-basis point increase in carrying costs would add $6.7 billion to the nation’s annual interest rate charge.

In Tuesday’s Diary, we looked at how the U.S. government is going to be in a world of hurt when interest rates rise to a modest 5%.

We said it would add $600 billion to the cost of carrying $30 trillion of debt, which is the expected government debt level within 10 years.

A dear reader wrote in to wonder where we went to school. If all the $30 trillion yielded 5%, it would be a total extra annual interest charge of $1.5 trillion, not $600 billion. If the dear reader is right, the situation is even worse than we thought.

The feds collect about $3.5 trillion in tax revenue. So you can see why paying so much interest would be out of the question.

To continue reading: Bond Panic Spreads

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One response to “Bond Panic Spreads, by Bill Bonner

  1. Excellent analysis. And the normal interest rate is between 4-5%. I predict that the US and Western world will follow the paths of Venezuela, Zimbabwe, Weimar Germany and post war Hungary. Its only a matter of time before a 20 trillion debt strangles this economy.

    Like

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