by Alasdair Macleod, GoldMoney:
This chart strongly suggests that US Treasury bond yields, widely regarded as the risk-free yardstick against which all other credit is measured are going significantly higher, not stabilising close to current levels before going lower as commonly believed. I conclude that US Treasury bond yields could easily double, and the political class will be powerless to stop them going even higher. The implications for interest rates globally are that they will be forced considerably higher as well.
TRUTH LIVES on at https://sgtreport.tv/
This article concludes that reasoned analysis takes us to this inevitable conclusion. It is consistent with the end of the post Bretton Woods fiat currency era, and the return to credit backed by real values.
The collapse of unbacked credit’s value was only a matter of time, which is now rapidly approaching. The Great Unwind is under way. It is the consequence of monetary and currency distortions which have accumulated since the end of Bretton Woods fifty-two years ago. It will not be a trivial matter.
The trigger will be capital flows leaving the dollar, creating a funding crisis for the US Government. Foreigners, who have accumulated $32 trillion in deposits and other dollar-denominated financial assets will no longer need to maintain dollar balances to the same extent, perhaps even paring them back to a minimum. Furthermore, economic factors are turning sharply negative with energy prices rising ahead of the Northern Hemisphere winter, springing debt traps on western alliance governments. So how could bond yields possibly decline materially in the coming months?
Bond yields are embarking on their next rise…
The chart above of the yield on the 10-year US Treasury note exhibits the classic bull market of Dow theory. The price, which is the bond yield, is above the shorter rising moving average which in turn is above the longer-term moving average which is also rising. After an initial increase between March 2020 and October 2022, bond yields had entered a period of consolidation lasting since then, finding concrete support at 3.75% last month where it converged with the two moving averages. And with rising yields, bond prices fall as the bankers at Silicon Valley Bank discovered to their cost.
US Treasury yields are not alone. All the Eurozone bonds, UK gilts, and Japanese government bonds exhibit the same frightening condition. The two charts below of 10-year maturity UK gilts and German bunds illustrate the point.
UK Gilt yields appear to have even more upside momentum than US Treasuries, and the underlying bullish forces driving German bund yields are powerful enough to have skewed the consolidation upwards. And in Tokyo, where the Bank of Japan is still clinging onto negative interest rates, its grip on market forces is slipping, as shown in the first of the two charts below.
The Bank of Japan’s determination to keep interest rates and bond yields in negative territory undermined the yen’s exchange rate by as much as 30%. Now that it appears to be losing control over bond yields, the yen carry trade is reversing. And the extent to which Japanese banks and investment funds along with international investors have borrowed and sold yen to invest in higher yielding bonds in other currencies, these flows are reversing to the benefit of the yen cross rate and the detriment of foreign bond markets.
There are other good reasons to suspect that the outlook for bond prices is not as benign as the majority of investors appear to believe. Clearly, those who think like the central banks that monetary policy is working, and inflation is gradually being conquered, and therefore that interest rates are sure to decline next year are in for a shock. The error comes from ignoring international investment flows and the complacency of projecting the experience of the last forty years into the future while assuming that current interest rate levels will suppress consumer demand without impacting on supply. But for all that to be even partly true, the currency and dependent credit must be sound.
It’s less about economics and more about faith in fiat
Fiat currency is inherently unstable. It is entirely dependent in the oft quoted phrase about the dollar’s value being based on the “full faith and credit in the government as its issuer”, a phrase that originated in “the authority to borrow on the full faith and credit of the United States is vested in Congress by the Constitution”. Taken literally, economics and monetary policy are secondary factors in a fiat currency’s valuation — lose faith in the issuer and the currency is doomed irrespective of economics. This, surely, is what has undermined tinpot regimes as much as their currency policies.
But the world is now tired of faith and credit in a weaponised dollar, and therefore of all the currencies which tag along with it. Other than the arrogance of weaponization of the fiat dollar, the trigger for a collapse in the faith and credit in the fiat dollar is the US Government’s policy of banning fossil fuels. The strategic wisdom of President Nixon and Henry Kissinger to tie the dollar’s future to energy demand has been undone in a stroke. The entire Gulf Cooperation Council, led by the Saudis, has now abandoned the 1973 agreement. The link is gone, and with it the dollar’s future security.
Inevitably, politicians in undeveloped economies around the world with safety in numbers now feel freed from the dollar’s tyranny. This is why they seek better international relationships with the Russian and Chinese axis. It coincides with a new realism in Africa and elsewhere, that the days of politicians lining their pockets with western aid programmes are over. Instead, genuine investment in infrastructure is the way forward and that is what China is already providing.
Part of the Asian package will be a better payment alternative to the dollar for commodity and raw material exports. There is also the promise of vertical infrastructures, enabling these countries to capture not just commodity values, which they believe to be suppressed by the American financial system, but more of the downstream value chains as well. Global capital will flow away from yesterday’s story, which has been America and Europe, into this new virgin territory of investment opportunities.
There is little doubt that US foreign policies have become very sensitive to capital flows. This issue made sense of President Trump’s attack on Chinese technology and on Hong Kong during his tenure. America could ill-afford to see international investment capital be diverted from America to China. And today, the US Treasury is feeling this pressure with foreign investment in its debt stalling at a time when they are most needed, and threatening to turn into net selling.
Since Nixon’s deal with the Saudis in 1973, the accumulation of dollars in foreign hands has grown to enormous proportions. According to the US Treasury’s own TIC figures, on current valuations, about $24.5 trillion are invested in long-term financial assets, comprising US Treasuries, agency, and corporate bonds totalling about $10 trillion, and $14.5 trillion in equities. Additionally, there are $7.5 trillion in short-term securities and bank deposits.
These have accumulated under the widespread assumption that the dollar’s reserve and hegemonic status will continue for ever. By the Saudis abandoning the 1973 Nixon deal with King Faisal, that assumption is no longer true. In conjunction with Russia and the Iranians, the Saudis will undoubtedly seek a better settlement alternative for their energy exports to the fiat dollar, and that is what the Russians say is on the agenda for the BRICS summit later this month.
