The bond market is experiencing what David Haggith Wolf Richter calls a “bond bloodbath” as delusions about the Federal Reserve’s fight against inflation begin to fade. The latest retail report shows high increases in retail sales, largely due to inflation. The bond bubble, which is part of the larger “Everything Bubble” created by the Fed, is now bursting, a significant event that will impact the entire economy.
The long-term yields above 5% indicate a gradual return to normalcy in the bond market as inflation resurfaces. For years, the Fed’s quantitative easing and interest rate repression kept assumptions about inflation at bay, but now those assumptions are proving to be false. This regime change marks a significant shift in market dynamics, and all previous beliefs are now irrelevant.
Richter notes that the long-term treasury market is slowly abandoning its illusions about inflation and adjusting interest rates. The Fed’s financial demolition is causing a breakdown of these illusions, and if it fails, inflation will do the job. The Fed’s tightening measures will likely lead to a severe recession, and the subsequent crash of the “Everything Bubble” will plunge the economy into panic.
The bursting of the Big Bond Bubble was inevitable due to the Fed’s quantitative tightening, raising of interest rates, and the government’s massive deficit. The government’s deficit-spending creates a demand for Treasury securities, which must find buyers. The rising yields on these securities signify a return to normalcy but cause significant losses for investors who bought long-term bonds during quantitative easing.
The housing market is also taking a hit as mortgage rates rise due to the bursting of the bond bubble. The decline in demand for mortgages is the lowest it has been since 1995, and the housing market is freezing over. The decline in bond funds and the devaluing of bank reserves will likely lead to bank failures. The realization of losses in bond values will exacerbate the situation, as seen during the spring of this year.
Wall Street bond investors are concerned about the swelling US debt, which has contributed to the run-up in bond yields. The Federal Reserve faces policy challenges as it grapples with how to respond to the country’s substantial debt. If the Fed postpones plans for another interest-rate increase, it will be simply trying to catch up with the free market, which is already driving bond yields up.
The Fed cannot help the government finance its massive deficits without causing further inflation. Even if the government manages to slow down spending, the Fed’s roll-off of Treasuries will worsen the situation for bonds. The rising inflation is now a major concern for investors, as it can lead to higher long-term interest rates, which can hinder economic growth and increase unemployment.
In conclusion, the bond market is experiencing a “bond bloodbath” as delusions about the Fed’s fight against inflation come to an end. The bursting of the Big Bond Bubble will have widespread effects on the economy, impacting the housing market, bank reserves, and investor portfolios. This situation puts pressure on the Federal Reserve to respond appropriately, but its options are limited due to the country’s growing debt. As inflation rises, it becomes a significant fear factor for investors, potentially leading to higher interest rates and economic instability.