The bonds that bind

Why the bond market might keep America’s next president awake at night

Over the past year or so, the world’s most important asset market has malfunctioned twice

The treasury market has long been able to strike fear into the hearts of the powerful. 

Frustrated by worries in the 1990s that bond yields would spike if Bill Clinton, then America’s president, pushed through economic stimulus, James Carville, his adviser, joked that he wanted to be reincarnated as the bond market, because “you can intimidate everybody”.

In the quarter-century since then, Treasuries have only become more pivotal to the world’s financial system. The stock of tradable bonds amounts to $20.5trn, and is expected to approach 100% of America’s GDP this year, roughly double the share in the 1990s (see chart). 

The dollar’s dominance means that everyone holds them, from American banks and European pension schemes to Arab sovereign-wealth funds and Asian exporters. 

The yield on Treasuries is known as the “risk-free” interest rate, and underpins the value of every other asset, from stocks to mortgages. 

In times of stress investors sell racier assets and pile into Treasuries.

As The Economist went to press the outcome of America’s presidential election was still unknown, but the likelihood of a Biden presidency and a Republican-controlled Senate was rising. 

The yield on ten-year Treasuries fell by 0.12 percentage points to 0.78% on November 4th, perhaps on expectations that government spending will be stingier than if a blue Democratic wave had swept over Congress. 

Still, the next president may find himself worrying about the bond market—not because of the vigilantes that annoyed Mr Carville, but because of the risk of a snarl-up in the bond market’s plumbing, just as the scale of government borrowing rises sharply.

On October 14th Randal Quarles, the Federal Reserve’s regulatory boss, said that the Treasury market’s expansion over the past decade “may have outpaced the ability of the private-market infrastructure to kind of support stress of any sort”. 

His comments were prompted by the fear of a repeat of the extreme stresses in March and April, as the economic threat of covid-19 became clear. Usually a haven, the Treasury market convulsed. 

The bid-ask spread—the gap between the price at which you can buy a bond and that at which you can sell—was 12 times its typical level. The spread between “on-the-run” bonds, which are recently issued and tend to be most liquid, and older “off-the-run” Treasuries widened. Investors rushed to dump their holdings. 

Municipal-bond yields, which tend to trade at 60-90% of Treasury yields, spiked above 350%. The chaos spread to corporate-debt markets and panicked equity investors, forcing the Fed to act.

To understand why the Treasury market broke down, consider how the burdens on the system have grown. The debt stock has risen from $5trn in 2007, owing to stimulus after the financial crisis, deficits under Donald Trump, and stimulus this year. 

At the same time, “the provision of credit to households and businesses has become much more market-based and less bank-based,” Nellie Liang of the Brookings Institution, a think-tank, said at an event held by the New York Fed in September. Non-bank firms facing redemptions in a crisis rely on selling Treasuries to meet demand, placing further strain on the system.

As the demands upon them grew, though, the pipes through which Treasury trades are intermediated began to shrink. Trading depends on so-called “primary dealers”—a handful of firms allowed to buy bonds directly from the American government. Access to issuance lets these dealers—largely housed inside big banks, like JPMorgan Chase or Goldman Sachs—also dominate the intermediation of most Treasury trading. 

But their ability to make markets has been curtailed by tighter regulations after the financial crisis, such as the introduction of the supplemental leverage ratio, which measures the total size of bank assets relative to the amount of capital they hold. 

The rule is “not very friendly to low-risk activities, which include buying Treasuries,” says Pat Parkinson of the Bank Policy Institute, a lobby group.

In the spring the Fed eased pressures by buying Treasuries from market participants struggling to sell them to intermediaries. To encourage dealer activity it also allowed banks to exclude reserves held with the Fed and Treasuries from their leverage ratios. That marked the Fed’s second intervention in a year. 

In September 2019 it eased the pressure on dealers after repo rates—the price paid to swap a Treasury overnight for cash, a key funding market for Treasuries—spiked to over 10%.

Such strains may become more apparent over time. Whatever the scale of stimulus enacted next year, the bond market will swell further. The Congressional Budget Office expects federal debt to be worth over $120trn in 2050, or 195% of gdp. The result is that “in ten or 15 years only half as big a shock as covid-19...would cause the same degree of Treasury-market dysfunction,” noted Darrell Duffie of Stanford University, at the Fed’s conference. “And after that, yet smaller and smaller shocks would be enough to choke dealer balance-sheets with demands for liquidity.”

To ward off such a scenario, academics and market participants are considering how to revamp the system. The main principle involves expanding intermediation capacity. That could be done in many ways. Restrictions that curtail intermediation could be loosened; or the roster of primary dealers could be expanded, to include more banks and non-bank institutions.

Other solutions are more radical. Instead of trading through brokers, as they do today, market participants could trade directly with each other. At present counterparty risk deters direct trades; a central clearing-house—a solution proposed by Mr Duffie—could change that. 

With such a set-up in place, the market might not have seized up earlier in the year. 

“We were actually in a position to be a liquidity provider,” Sarah Devereux of Vanguard, a giant asset manager, said in September. “It was hard to sell bonds, but it was also difficult to buy bonds, for example, off-the-run Treasuries, when they got to very attractive levels.”

The Fed could also make some of its interventions permanent. William Dudley, a former Fed official, favours a “standing repo” facility, which would allow holders of Treasuries to swap them for cash at any time, reducing the likelihood of a panic. 

Whatever the solution, the bond market’s importance is such that it would be welcomed not only by America’s lawmakers, but by the world’s investors too. 


by Egon von Greyer

The US election has finally taken place. During the campaign, both candidates have totally avoided the critical issue that will bring the US down in the next four years. The election campaign has been ugly but totally avoided the monumental problem facing the American people.

Clearly neither of them wanted to tell the voters that he will take over the running of a totally bankrupt country that is likely to collapse economically, financially and morally in the next four years.

At the end of this article I have set out what would have been the winning election manifesto.


Neither Trump, nor Biden has been telling the American people that the US is a totally bankrupt country that has been running deficits for 90 years. (Four small exceptions in the 1940s and 50s. The Clinton surpluses were fake.)

What an unenviable task to preside over an insolvent nation and be hated by everyone as the country falls into perdition.

How can anyone be willing to run a nation that needs to borrow half of its budget expenditure. The clear facts are on the table. You cannot erase 90 years of mismanagement.

The figures tell us the truth. In fiscal 2020 spending was $6.6 trillion and tax revenue $3.4t. So the deficit was a staggering $3.2t. And as history shows us, it can only get worse. The state of the financial system, exacerbated by Covid, guarantees galloping deficits from hereon in.


The US federal debt by the time the new president takes over will be at least $28t. This was totally predictable based on a simple extrapolation as in my article from Feb 2018. 

In the same article I predicted that the debt when the next president takes over in Jan 2025 would be $40t. See graph below. I was probably much too cautious since the way things are going now $40t seems too low.

So why hasn’t either candidate told the truth and laid out the facts that the US will need to borrow more than the total tax revenue to pay trillions in Medicare, Social Security, Defence etc.


And why is neither candidate telling the people that the consequences of a 90 year deficit policy has led to a 98% fall in the value of the dollar, in real terms, which is against gold.

Virtually every president in history has boasted about the strong dollar but no one has told the American people that the dollar is hardly worth the paper it is written on. And neither candidate has told the voters that in the next few years, unlimited money printing will be required in a futile attempt to save the US economy and the nation from total destruction.

Whatever the Keynesians or the MMT crowd say, you can NEVER reach prosperity by printing worthless pieces of paper or pressing a computer button. If these theories were valid, the world could stop working and just print, print and print.


Only gold reflects what is happing to the value of fiat money. But not even gold shows the true situation since the massive amount of paper gold outstanding disguises the true price of gold. But the paper gold market is likely to fail within the next few years as debt explodes and the value of fiat money implodes.

Because it is the accelerated money printing that will lead to the destruction of the dollar and all paper currencies.

The current gold price is not even reflecting the money printing and credit creation that we have seen so far. The graph below shows that in relation to US money supply, gold today is as cheap as it was in 1970 when the gold price was $35 or in 2000 when gold was $288.

With the expected and required explosion in money supply in the next four years, gold will rise exponentially from here.


In his 7 Habits book, Steven Covey told us to focus on the square prioritising matters which are IMPORTANT but NOT URGENT. Sadly most people and especially the politicians and the media focus on the wrong square which says URGENT but NOT IMPORTANT.

It is in this latter square that today’s instant gratification world spends most of its energy and time. That includes, answering a Text message when you are in an important conversation with someone or always giving a mobile phone incoming call priority over whoever you are with.

Many business leaders tend to fight short term emergencies instead of planning for the long term strategy and prosperity of the business.


Politicians are of course the worst. They seem to go from one crisis to another in their fight for survival. In the UK, the people decided in 2016 to exit the EU. Parliament, big business and the media could not accept the outcome. 

Nor could the Remainers who lost the vote. Not until Boris Johnson became Prime Minister in July 2019 and subsequently won an unassailable majority in Parliament, could Brexit finally be implemented.

Before that, the UK spent 3 1/2 years debating Brexit and nothing else. The fact that the UK economy was quickly deteriorating, the government did not have time to focus on. Nor did the media which tried everything to sabotage Brexit.

So the UK spent all this time in the wrong square, just squabbling about Brexit as the walls of Jericho were tumbling around them.


And exactly the same is happening in the biggest economy in the world. Since Trump was elected 4 years ago, the opposition and the media have totally focused on getting him out of office with any kind of dirty tricks including Russian connections and impeachment.

So for Trump, there have been 4 years of fighting all kinds of imaginary windmills (Don Quijote). These were windmills erected by his enemies to prevent him to deal with the important and urgent matters like a faltering economy that can only survive on printed money and debt.

But a politician who is elected for 4 years only, must in any case, after the first 18 months, focus on how to buy votes for the coming election. And the people demand instant gratification and not the hardship necessary to put the economy right.


And that is why neither candidate has ever dared to conduct a serious discussion about the fact that the US is bankrupt. 

Below is what the winning candidate should have said. 

But who would vote for a candidate with the following manifesto:

“Our nation is bankrupt. We cannot make ends meet and we need to eliminate Medicare/Medicaid, Social Security and Defence totally to balance the budget. That will save us $3 trillion which almost covers the 2020 deficit.

The problem is that we expect a bigger deficit next year. Covid is paralysing major parts of the country and will be very costly. It will also have permanent negative effects. In addition, we expect major problems in the insolvent financial system. This will necessitate the printing of further trillions of dollars or even tens of trillions.

But as we print these dollars, we get an ever bigger problem. The value of the dollar will fall precipitously and we will need to print and borrow even more. That will create a vicious circle with a lower dollar, bigger deficits and bigger debts plus inflation.

So these are the facts. I am obviously very sorry to present these to you but I am certain that there can be no other outcome.

I sincerely hope that you will elect me on this platform. After all, I am the only presidential candidate in history who has told his people the truth and the real state of the nation.

And please don’t believe the fake promises of the other candidate. A liar doesn’t deserve to be president.

Finally, I promise to do my best to manage the coming disorderly collapse of the USA to the best of my ability.”

Turkey and France: More Than Just a War of Words

For Paris, the latest tiff is about reclaiming its influence. For Ankara, it’s about distracting its citizens. 

By: Caroline D. Rose

Last month, a cartoon depicting Turkish President Recep Tayyip Erdogan lounging in his underwear graced the cover of French magazine Charlie Hebdo. The publication once again raised eyebrows in Europe, but it raised tempers in Ankara, especially following a quarrel between Erdogan and French President Emmanuel Macron that quickly escalated into personal insults, a diplomatic showdown and a boycott on French goods.

Direct military conflict is not in the cards, but the dispute is more than just a dramatic war of words. The latest spat has been co-opted by both France and Turkey as an opportunity to garner regional credibility and apply an ideological-religious dimension to their rivalry in the Eastern Mediterranean. 

For France, it’s about earning credibility in the EU and among Eastern Mediterranean allies. For Turkey, it’s about distracting its citizens from financial hardship and positioning itself as the leader of the Sunni Islamic world. And for both, the means to their respective ends is to broaden existing divisions.

Water and Oil

The row began with a debate over the role of political Islam in French society. After a string of terrorist incidents, Macron said that political Islam was "in crisis" all over the world and incompatible with stability, that France would fight Islamic separatism, and that the government would respond to the attacks with reform. 

Though the next presidential election isn’t until 2022, the fear over Islamic extremism and terrorism, combined with the stress of COVID-19, has put the president and his government under pressure to act. Within days of the attacks, the French government cracked down on Islamist groups such as the Turkish nationalist Grey Wolves and announced that later this year it would amend a 1905 law that will further prohibit outward displays of religious affiliation and increase oversight over Muslim communities to curb foreign funding and influence.

Turkey, which fancies itself as a leader of the Islamic community, was quick to respond. Erdogan criticized Macron for peddling Islamophobic narratives, saying Islam did not need to be “fixed” and that the French president needed “some sort of mental treatment,” and called on Islamic nations to condemn France for its treatment of Muslims and to boycott French-produced goods. 

Erdogan’s comment on mental health was apparently the final straw; Paris made the unprecedented move of recalling its ambassador and warned Ankara of its “dangerous” course of policy.

France and Turkey have locked horns over domestic issues before but share a deeper divergence on foreign policy – particularly throughout the Mediterranean region. Both countries have faced off there before, such as when Ankara and Paris backed opposite sides in the Syrian and Libyan civil wars. 

Turkey’s steadfast support of Sunni Islamism has led Ankara to fund, supply and back ideologically aligned factions like the Government of National Accord in western Libya and anti-government militia Hayat Tahrir al-Sham in Syria. These stand in direct opposition to the French-supported Libyan National Government in eastern Libya and Kurdish militants operating in northern Syria.

Both countries also have incompatible strategies regarding the Mediterranean’s natural resources. France’s energy giant, Total, has a large stake in several energy projects in the Mediterranean’s “energy triangle.” 

Turkey, which has little proven hydrocarbon resources in its own waters, has turned its attention toward proven fields in disputed maritime zones – sites of projects in which Total operates and in which France has a strategic interest. 

France has sided with a burgeoning regional coalition – the Eastern Mediterranean Gas Forum, comprising Greece, Cyprus, Egypt, Jordan, Italy, Israel and the Palestinian Territories – in opposing Turkish encroachment in Mediterranean waters. And within the past two years, Paris has become one of the most vocal to lobby against Turkish moves both inside and outside of the Eastern Mediterranean.

France’s Stake

To establish its influence in the Mediterranean and Europe, Paris has adopted an unforgiving position against Turkey. In May, it took a central role in a mission to uphold an arms embargo on Libya by deploying an anti-aircraft frigate and a La Fayette-class frigate to the region. French vessels were especially suspicious of foreign-flagged vessels suspected to be Turkish smugglers aiding Libya’s GNA.

But France believes the EU offers greater space to maneuver. Answering the calls of Greece and Cyprus, Paris has consistently lobbied for sanctions against Turkey and has called for European countries to join forces to create a “Pax Mediterranea.” In the long run, France means to reclaim influence the EU has lost in the Mediterranean and, in doing so, edge out its top European rival, Germany, for the role. 

(In the past, the EU usually deferred to France on most southern European issues. But as energy opportunities and fresh conflicts have come to light, Germany and the European Council have asserted more oversight, passing over more hardline French-Greek-Cypriot proposals in favor of mediation and de-escalation.)

All the while, France has tried to turn the EU against Turkey, and the most recent dispute with Ankara has given EU leaders a stronger case to do so. Erdogan’s comments against Macron, for example, were met with condemnation from EU allies. The EU’s top diplomat, the president of the European Council, and even the German foreign minister issued harsh statements condemning Turkey. 

An EU spokesman also hinted the EU would soon organize an emergency meeting to discuss a response, sending a message to Ankara that the EU expects “a change in action and declarations.” France has failed before in convincing its hesitant EU peers to sanction Turkey, but its latest tiff with Ankara has given it more ammunition for the next round of talks.

Turkey’s Intentions

For its part, Turkey has maintained the tempo of contested energy exploration missions and of gunboat diplomacy in the Eastern Mediterranean, even as it sees an opportunity to turn this geopolitical dispute into an ideological-religious dispute that could help the ruling party maintain political popularity. 

Turkey’s deteriorating economy has prompted Erdogan to manufacture a series of foreign policy distractions that could at least temporarily shift domestic attention abroad, garner support among the party’s nationalist, conservative Muslim political base, and position itself as a leader of the Islamic world.

Erdogan is attempting to elevate Turkey as the inheritor of Sunni Islamic leadership. 

This year alone, Turkey converted the Hagia Sophia museum into a mosque and has adopted the Palestinian cause. The spat with France, then, plays into his hands – all part of his neo-Ottoman strategy. 

By criticizing Macron and calling for a boycott, Erdogan is brandishing his Islamic bona fides and whipping up enthusiasm among his supporters. It’s right out of his playbook for 2018, when he did something similar when the value of the lira went into free fall.

But this time, Turkey’s call among Muslim countries broadened the boycott’s effect, leading Qatari and Kuwaiti supermarket chains to drop French products in stores and pressure French supermarket chain Carrefour in Saudi Arabia and the United Arab Emirates. 

Turkey was also successful in getting Pakistan, Saudi Arabia, Iran, Egypt and Malaysia to condemn France’s handling of its Muslim communities, even inciting dayslong anti-France protests in Lebanon, the Gaza Strip, Iraq, India and Bangladesh.

The Justice and Development Party, or AKP, is still the most popular party in Turkey, but because of a weakening currency and domestic instability, its numbers are starting to slip. That gives Erdogan a smaller margin for error.

Recent polls have shown that the Turkish government’s strategy to retain political popularity is slipping. Short-term distractions can preoccupy Turkish citizens for only so long. Erdogan’s AKP continues to hold a majority, but smaller margins of popularity will dissuade the government from major missteps. 

While Turkey may try hard to shroud its rivalry with France as an unyielding clash of civilizations, the reality of EU sanctions, eagerly led by France, will increase the pressure on Ankara. 

The war of words may soon die down, but the Turkish-French rivalry is not going anywhere.

Companies Fret Over Coronavirus Despite Rebound

Results from auto makers to cereal producers are better than expected, but firms remain hesitant about the future. ‘The world is in a fragile state.’

By Micah Maidenberg

Workers assembled Volkswagen ID.4 electric sport-utility vehicles in Germany in September. Volkswagen posted a profit in the third quarter./ PHOTO: JENS SCHLUETER/GETTY IMAGES

Business for many companies rebounded faster than expected following the coronavirus-related economic shock this spring, but many corporate leaders are warning that the bounceback wasn’t uniform and may prove fleeting as infections surge again.

Stronger demand buoyed companies ranging from auto makers to cereal producers during the quarter that ended in September as businesses and consumers adapted to the disruptions caused by the coronavirus. 

Yet executives described the path forward as tenuous, with caseloads hitting records in the U.S. and government officials in Europe and elsewhere imposing limits on some activities.

“It is not a straight-line recovery around the world,” Coca-Cola Co. Chief Executive James Quincey told investors last month after the beverage giant said quarterly revenue fell 9%, more moderate than the 28% decline in the prior period. “It’s important to remember the world is in a fragile state.”

Even companies that have benefited from shifting customer behavior during the pandemic, like Apple Inc., AAPL -5.60% have sounded cautionary notes. 

The company on Thursday declined to offer a revenue forecast for its current quarter, disappointing investors. Luca Maestri, Apple’s chief financial officer, cited “the continued uncertainty around the world in the near term.”

Other companies have announced fresh rounds of job reductions as the pandemic continued to drag down their end markets. Exxon Mobil Corp. XOM -1.06% plans to cut up to 15% of its global workforce, including 1,900 positions in the U.S., over the next year. 

Boeing Co. BA -2.63% said last week that it expects to reduce its head count by another 11,000 employees, including 7,000 layoffs, on top of the almost 20,000 already announced.

“The coronavirus remains a central problem,” said Frank Witter, finance chief at Volkswagen AG VOW 2.62% , as the world’s largest car maker by sales reported a third-quarter profit of €2.6 billion, equivalent to $3 billion, compared with a loss in the previous quarter.

The cautious tone from executives comes after many companies reported better-than-expected quarters. 

Of the 64% of companies in the S&P 500 index that had given results as of Friday, more than 80% have posted revenue and per-share earnings above analyst estimates, according to FactSet, on track to be the highest such levels since the company started tracking those metrics in 2008. 

Overall, though, revenue and earnings for the quarter are still expected to decline year over year, but by a smaller percentage than the June quarter and what was expected by analysts a month ago.

Coca-Cola’s profit fell in the third quarter but not as sharply as it did in the second quarter./ PHOTO: MARK HERTZBERG/ZUMA PRESS

Helping companies was a strong rebound in gross-domestic product in the U.S. and across the eurozone during the third quarter; however, economic forecasters and government officials believe economies in both regions will likely lose steam as the year ends. 

The International Monetary Fund expects China will be the only major economy to grow this year overall.

Diverging outlooks for growth across global markets is making it difficult for companies to forecast the end of the year, executives said. 

Samsung Electronics Co. , which reported a 49% increase in quarterly profit for the third quarter, said its television business faces fresh challenges in the fourth quarter due to the spread of the coronavirus in markets such as the U.S. and Europe.

“Some of these countries may go back into lockdown,” Kim Won-hee, vice president of Samsung’s visual-display business, told investors. “This may lead to economic contraction globally on a long-term basis.”

Tech companies have been among the biggest winners as more people spend more time working and socializing at home, and as businesses invest in digital tools to adapt to the trend. 

For the latest quarter, Apple, Inc., Google parent Alphabet Inc., Facebook Inc. and Microsoft Corp. collectively generated 18% more revenue than in the year-earlier period.

But those giants are also having trouble laying out how 2020 will wrap up and what next year might bring. Amazon finance chief Brian Olsavsky said the company generally faces issues tied to the holidays, such as spending levels, and noted it saw some disruption during the election four years ago. But the coronavirus remains the major issue Amazon is trying to navigate.

“I think the fact that Covid is dwarfing all of those is causing us a lot of uncertainty on our top-line range,” he said Thursday after the company said revenue shot up 37% for the third quarter to $96.2 billion and profit almost tripled. 

The company forecast $112 billion to $121 billion in sales for the current quarter. expects high volume for the fourth quarter. / PHOTO: ANDREW HARRER/BLOOMBERG NEWS

Facebook operations chief Sheryl Sandberg said the next few quarters will continue to be precarious for many businesses. 

The social-media company also said its own performance next year is uncertain, citing potential changes in demand for advertising related to online commerce.

Executives say they are focusing on controlling the variables they can by using the pandemic to position their companies for the long term. That includes Kellogg Co. , the company behind cereals such as Corn Flakes, which has benefited as consumers buy more food to eat at home.

“We believe that this crisis, as terrible as it’s been, has given us an opportunity to really engage with consumers in meaningful and lasting ways and to make those investments to emerge stronger,” Kellogg Chief Executive Steve Cahillane said. The company on Thursday raised its comparable-sales forecast for 2020.