This article was originally published by Michael Snyder at The Economic Collapse Blog.
National governments around the world collectively have more than 100 trillion dollars in debt. The United States accounts for about 35 percent of that total, China accounts for about 16 percent of that total, and Japan accounts for about 10 percent of that total.
For a long time, national governments were able to fund their debt binges very cheaply, but now nervous investors are demanding higher interest rates to hold long-term government debt. This is driving up borrowing costs, and it has thrown credit markets around the globe into a state of chaos. If bond yields continue to rise at a very brisk pace, there is a risk that investors could become so nervous that credit markets actually start freezing up. If that were to happen, the entire global financial system would go completely haywire.
Yesterday, I specifically warned that we need to keep “a close eye on Japanese bond yields”.
Today, tepid demand for 20-year Japanese bonds pushed Japanese bond yields into extremely alarming territory…
The Tokyo tremor began on Tuesday, when the government tried to sell 1 trillion yen (£5.2bn) of March 2045 bonds and encountered lacklustre demand.
The average bid-to-cover ratio, which measures investor appetite, dropped to 2.5 – the lowest since 2012. The 1.14-point gap between the average and lowest-accepted prices, known as the “tail”, was the longest since 1987.
Investors responded by pushing the Japanese government 20-year yield to the highest this century, and the 30-year yield to a record.
This is a monster story.
I don’t understand why this isn’t front-page news all over the planet.
The shaking of the financial system in Japan is unlike anything that we have seen in decades.
Of course, the U.S. financial system is being shaken as well.
Moody’s just downgraded our credit rating, and Treasury bond yields continue to rise…
The 30-year Treasury bond yield last traded around 5.08%, the highest level going back to October 2023. The benchmark 10-year Treasury note yield traded at 4.59%.
Long-dated bonds sold off as traders worried a new budget bill would worsen the U.S. deficit. The measure is expected to pass as lawmakers reach a compromise on state and local tax deductions as investors head into Speaker Mike Johnson’s Memorial Day deadline. Yields spiked even higher after a poor afternoon auction for 20-year debt, raising fears investors may be losing their appetite for funding America’s deficits.
Just like we are witnessing in Japan, investors are quickly losing their appetite for our bonds.
We are already spending about a trillion dollars a year just in interest on the national debt, and now our borrowing costs could be headed a lot higher.
This is extremely bad news.
One analyst is warning that we have entered a time when “bond traders are willing to punish high-debt nations with large deficits”…
“The pressure on both Japanese and US bonds this week is a sign bond traders are willing to punish high-debt nations with large deficits,” says Kathleen Brooks, an analyst at XTB.
In other words, the party is ending.
But our politicians in Washington don’t seem to have gotten the memo.
The spending bill that is currently going through Congress would add another 20 trillion dollars to the national debt in the years ahead.
That is suicidal.
We just can’t do that.
We have been able to defy the laws of economics for a long time, but now economic reality is catching up with us in a major way.
Needless to say, the Europeans are in the same boat, and Google AI says that their bond yields have been rising as well this month…
European government bond yields have generally increased this month, particularly for longer-dated bonds. For example, TradingView reports that Eurozone government bond yields rose on Wednesday due to oil price increases, with Germany’s 10-year yield up 4 basis points. Over the month, Germany’s 10-year yield has increased by 18 basis points, while the UK’s 10-year yield has increased by 19 basis points.
What we are witnessing is truly a worldwide phenomenon.
The global trade war has made everyone very jittery. GDP projections have turned negative all over the planet, and some nations such as Japan have already entered contraction territory.
In an environment where global economic activity is slower, that is going to make it even more difficult for national governments to bring in sufficient revenue to service their debts.
So investors are demanding higher rates, and that is going to push up borrowing costs.
Of course higher borrowing costs will put additional pressure on the finances of national governments.
We could potentially be entering a vicious cycle of higher rates and higher borrowing costs, and that wouldn’t be good for any of us.
If interest rates rise too quickly, that could spark a major derivatives crisis. According to Google AI, interest rate derivatives account for “about 80% of the total global OTC derivatives notional outstanding”…
The global market for interest rate derivatives (IRDs) is a significant portion of the overall derivatives market. At the end of 2023, the notional outstanding for IRDs was approximately $579 trillion. This figure represented about 80% of the total global OTC derivatives notional outstanding, as of mid-year 2023. IRDs, including interest rate swaps, forward rate agreements (FRAs), and options, are used by financial institutions to manage interest rate risk.
A major derivatives crisis would be extremely destructive.
For a moment, try to imagine a giant financial tsunami that smashes one enormous financial institution after another with no end in sight.
That is what we are potentially facing.
For years, I have been warning about the enormous amount of exposure that the largest U.S. banks have to derivatives.
But for a long time, it seemed like everything would be just fine.
Unfortunately, a day of reckoning is now upon us, and it appears that this crisis could soon get really, really messy.
Michael’s new book entitled “10 Prophetic Events That Are Coming Next” is available in paperback and for the Kindle on Amazon.com, and you can subscribe to his Substack newsletter at michaeltsnyder.substack.com.
About the Author: Michael Snyder’s new book, entitled “10 Prophetic Events That Are Coming Next,” is available in paperback and for the Kindle on Amazon.com. He has also written nine other books that are available on Amazon.com, including “Chaos”, “End Times”, “7 Year Apocalypse”, “Lost Prophecies Of The Future Of America”, “The Beginning Of The End”, and “Living A Life That Really Matters”. When you purchase any of Michael’s books, you help to support the work that he is doing. You can also get his articles by email as soon as he publishes them by subscribing to his Substack newsletter. Michael has published thousands of articles on The Economic Collapse Blog, End Of The American Dream, and The Most Important News, and he always freely and happily allows others to republish those articles on their own websites. These are such troubled times, and people need hope. John 3:16 tells us about the hope that God has given us through Jesus Christ: “For God so loved the world, that he gave his only begotten Son, that whosoever believeth in him should not perish, but have everlasting life.” If you have not already done so, we strongly urge you to invite Jesus Christ to be your Lord and Savior today.
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