BOND COLLAPSE IS COMING / MACLEOD FINANCE

Bond collapse is coming

Long maturity bond yields are breaking out on the upside. Steepening global yield curves signal an imminent crisis in all fiat currencies and financial assets, driving gold higher.

ALASDAIR MACLEOD

Long maturity bond yields are breaking out on the upside. Steepening global yield curves signal an imminent crisis in all fiat currencies and financial assets, driving gold higher.

We know that rising gold prices reflect falling currency values. 

Having consolidated previous rises for the last four months, gold appears ready to continue its upward trend. 

At the same time, long maturity bond yields in major credit markets are also signalling further increases. 

It would appear that these events are linked, and if so, a credit crisis from higher bond yields will undermine all credit values and will be reflected in far higher gold prices.

This article looks at how this credit crisis is likely to evolve.

Introduction

There is increasing concern over government debt, even leading to speculation that the US Treasury will mobilise its gold reserves to alleviate funding difficulties. 

And there is a growing realisation that President Trump’s spendthrift tendencies will not be covered by tariff revenues and that US debt is increasing at an accelerated rate. 

Currently at $37.25 trillion, it has increased by over $10 trillion in the last five years and is still accelerating.

It has to be financed at a time of growing reluctance to buy both dollars and longer maturity bonds at current yields. 

Consequently, government funding is increasingly short-term, notably in US treasuries where the Fed depends disproportionately on bank finance being directed into treasury bills. 

It is now becoming likely that the trigger point for an upcoming financial and systemic crisis will be a further lurch higher in global government bond yields. 

Yield is the price of risk, and risks of defaults are rising.

This article looks at government bond markets in the four major currencies. 

They all tell the same story, which is that long bond yields are going considerably higher, and very soon. 

Most likely, in the next few weeks yields will break out from their summer torpor, embarking on an unstoppable surge higher. 

The implications for all financial assets, particularly overvalued equities, are that they will crash. 

With capricious US tariff policies, it looks alarmingly like a September 1929 redux.

We have an extraordinary mismatch between investment expectations and what is happening to bond yields. 

Particularly at the long end, maturities are rising again, signalling higher yields to come. 

First, we look at Germany’s 30-year bund yield:

Germany’s bond market is the marker for the entire Eurozone debt market. 

After a 10-month consolidation from last October, the 30-year maturity yield is breaking out into new high ground. 

Over the same time period, the DAX equity index rose by 25% and is close to all-time highs. 

The kicker in this valuation lunacy is that Germany’s economy is being hollowed out, as respected economist Thorsten Polliet’s recent tweet shows:

Germany’s stock market is being driven by an unsustainable credit bubble, with investors partying on the slopes of an active volcano.

While Germany’s bond market is leading the way to asset destruction in the Eurozone, the US long bond is sending similar signals:

There can be little doubt about the strength of the underlying trend driving yields higher. 

And when, rather than if, the long bond’s yield leaves 5% behind there appears to be nothing to stop it going considerably higher.

The error made by investors schooled in Keynesian beliefs is to assume that the economy is probably heading into recession, permitting the Fed to accelerate its rate cutting programme as demand for credit declines. 

But with government borrowing soaring out of control while the means to pay for it (i.e. taxes based on private sector growth) deteriorating, longer maturity bond yields are bound to rise to reflect the very real credit risk of a debt trap. 

Then it is only a matter of time before the long bond yield goes above 5%, bursting the credit bubble which is fuelling the equity bull market. 

Since mid-May when the bond yield hit a multi-decade high at 5.1%, the S&P 500 has risen 15% and like Germany’s DAX is close to its all-time high.

The UK’s 30-year long gilt tells the same story, but even more aggressively.

Like the German bund, the long gilt’s yield has such strong rising momentum under it that not only is it already in new high ground, but it is set to accelerate rapidly higher. 

This timing is particularly awkward, because it looks like creating a financial crisis for the government ahead of the Autumn statement, whose date is yet to be announced but is usually in late-October or early-November.

Japan’s condition is also alarming. 

Our last chart is of the yield on the 30-year JGB bond:

This JGB’s yield is already rising exponentially, heading significantly higher and will lead the 10-year maturity higher which is the largest holding of the Bank of Japan. 

Japan’s financial condition, which everyone ignores, is chaotic and a collapse in its financial situation is increasingly inevitable.

Conclusion

We are beginning to see the shape of the next financial crisis. 

It will be triggered by rising bond yields — collapsing bond markets — and a growing realisation that instead of looking forward to lower interest rates they should be going higher, if the purchasing power of fiat currencies is to be protected.

It creates a dilemma for the four major central banks, because higher interest rates and bond yields will undermine over-valued financial assets and bankrupt zombie corporations faced with refinancing their over-leveraged balance sheets. 

Counterparty risk will spread rapidly through financial institutions, including banks. 

Collateral values will fall, forcing banks to liquidate leveraged market positions, potentially driving equities into freefall. 

And as buyers of last resort, central banks and finance ministries will almost certainly be overwhelmed.

This upcoming crisis marks the end of the fiat currency system. 

Not only will asset values collapse, wiping out personal wealth, but currency values will fail as well — currencies are simply central bank credit which without fixed rate convertibility into gold depend for their value entirely on its users’ faith in them.

The only escape route from this crisis is to preserve personal wealth as much as possible by holding corporeal money in everyone’s common law, which is physical gold and possibly silver.