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Warning: A Bond Market Crash Appears Imminent

Yesterday I penned a quick piece about the dangerous implications of the US 10 year yield closing above 4% after it briefly shot above that level early yesterday morning. Now it would appear that the alarm is neither false nor something to be ignored. There are real warnings starting to appear in what is becoming a market with little liquidity.

The recent situation in the United Kingdom where the Bank of England issued a warning that caused a rapid sell off on Wall Street yesterday is a mild event, yet prescient warning, compared to the massive risk of a US bond market crash. And that appears to be a real danger that is finally being discussed openly in finance circles.

This story from Bloomberg on October 6th speaks volumes:

Treasuries Liquidity Problem Exposes Fed to ‘Biggest Nightmare’


With rising risks of a global recession, escalating geopolitical tensions and the potential for further defaults by developing nations — not to mention ructions in a developed economy such as the UK — investors may not be able to rely on Treasuries as the reliable haven they once were.

We have seen an appreciable and troubling deterioration in Treasury market liquidity,” said Krishna Guha, head of central bank strategy at Evercore ISI. Regulators “really haven’t delivered yet any substantial reforms,” he said. “What we are seeing at the moment is a reminder that the work is really important.”

This one chart from that article above speaks volumes about the direction and risk that the Fed’s “it can’t happen here” mentality is exposing markets to:

For a follow up read to the article linked above, I highly recommend reading this Bloomberg piece from October 11th: The Most Powerful Buyers in Treasuries Are All Bailing at Once (subscription required).

If US Treasuries are not a reliable haven then where is the money going as overseas investors need to dump their potentially worthless US dollars?

From renowned global financial researcher Luke Gromen:

My readers will react with the “but gold is tanking” reaction and that is accurate. However that is paper gold, the fictional unicorn bandied about on the COMEX which may or may not exist and when the tide goes out this time the truth will be exposed. The physical delivery of gold by central banks around the world is higher and the price premiums they are paying does not seem to matter as those nations are insulating themselves from a dollar crash.

Marketwatch also has an opinion piece by Larry McDonald warning about a potential bond market crash:

The stock market is in trouble. That’s because the bond market is ‘very close to a crash.’


About 600 institutional investors from 23 countries participate in chats on the Bear Traps site. During an interview, McDonald said the consensus among these money managers is “things are breaking,” and that the Federal Reserve will have to make a policy change fairly soon.

Pointing to the bond-market turmoil in the U.K., McDonald said government bonds with 0.5% coupons that mature in 2061 were trading at 97 cents to the dollar in December, 58 cents in August and as low as 24 cents over recent weeks.

When asked if institutional investors could simply hold on to those bonds to avoid booking losses, he said that because of margin calls on derivative contracts, some institutional investors were forced to sell and take massive losses.

In other word dominoes.

The chart of the US 10 year Treasury does not reflect the pain that Larry McDonald talks about in the opinion piece above:

Now imagine what would happen to equity markets if in just one week yields popped above 4.5% or 5%!

The implications of such a rapid liquidation of US Treasuries may force Federal Reserve intervention to stabilize markets but the reality is such a move would be viewed as a “panic” action causing and even greater acceleration of selling in bonds and equities overwhelming the ability of the system to digest the fire sale. It would be akin to the initial actions in August of 2008 where the Fed thought that by putting Fannie and Freddie into conservatorship it would stabilize the system. In reality it destabilized the entire financial system even further, leading eventually to the “Lehman moment” and great crashes of September and October of that year.

The consequences of such an event, a sovereign credit crisis with a financial system seizure has never been accurately modeled nor contemplated. The current programming by the antiquated Fed economists and the US Treasury were modeled on the Great Financial Crisis not the prospects of something of this magnitude. The words “bank holiday” and “national emergency” will immediately enter into the lexicon of perplexed government and Fed officials as slamming on the emergency brakes is the only solution they understand; without contemplating the long term damage to the Western global banking system. Not to mention the immediate political instability it would create both domestically and internationally.

While many of my old listeners and readers might think “this reminds me of 2008” there is one major difference; this is not a crash of housing or related financial instruments this time.

It is a total systemic failure.

Got gold and silver?

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