Bond Panic Spreads

‘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 US 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.

Noxious problems

But that’s just the beginning. When trouble comes, it rarely comes alone.

Instead, like a gang of Baltimore teenagers, rising interest rates will bring a whole coven of noxious problems.

In raw numbers, the economy is no better today than it was under President Obama.

The growth rates are about the same. But stocks stand at the top of a rickety ladder…and debt levels are shooting higher.

The government’s own number crunchers in the Congressional Budget Office warn that federal spending increases and tax cuts will drain the Treasury of cash by sometime in March.

And the feds are already on schedule to issue $1.3 trillion of bonds in just nine months.

But who will buy them?

Not the Fed: It is expected to continue its ‘quantitative tightening’ (letting the bonds on its balance sheet shrink, not buying more)…at least until the ladder falls over.

And not consumers: They don’t have any money. 

Record debt

The only reason we have any growth at all is because consumers are willing to sacrifice their financial safety.

Instead of saving, they spend. The spending shows up on the positive side of the GDP ledger.

And the additional debt they’re taking on doesn’t show up at all.

But that doesn’t mean it doesn’t exist. Household debt is back up to a new record — over $15 trillion.

It’s been growing twice as fast as wages for the last 30 years. Now, every 1% point increase in interest rates — were it applied to the outstanding amount — would result in $150 billion of extra debt service costs.

And here’s where the math gets a little harder…

There are about 120 million households in the US. That’s an extra average cost per household of about $1,250 a year.

Where would the average American family get the money?

Its savings have been drawn down to keep the economy moving forward. Disposable income less personal outlays — savings — fell to 2.4% in the latest tally.

That’s the lowest level since 2005. And it leaves most households completely unprepared to deal with a financial setback.

Here’s with a look at the state of America’s households [figures from the Fed]:

    • Only 48% of adults have enough savings to cover three months of expenses if they lose their income.


    • An additional 22% could get through the three-month period by using a broader set of resources, including borrowing from friends and selling assets.


    • But 30% would not be able to manage a three-month financial disruption.


    • 44% of adults don’t have enough savings to cover a $400 emergency and would have to borrow or sell something to make ends meet.


    • Folks who had experienced hardship were more likely to resort to ‘an alternative financial service’ such as a tax refund anticipation loan, pawnshop loan, payday loan, auto title loan, or paycheque advance, which are all very expensive.


Oh, not to worry…the tax cut will put $1,000 into the average household’s pocket.

But interest charges and inflation will take it back when they’re not looking!

More to come…


Bill Bonner,
For Markets & Money

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money