We Just Witnessed The Biggest U.S. Bond Crash In Nearly 2 Years – What Does This Mean For The Stock Market?
U.S. bonds have not fallen like this since Donald Trump’s stunning election victory in November 2016. Could this be a sign that big trouble is on the horizon for the stock market? It seems like bonds have been in a bull market forever, but now suddenly bond yields are spiking to alarmingly high levels. On Wednesday, the yield on 30 year U.S. bonds rose to the highest level since September 2014, the yield on 10 year U.S. bonds rose to the highest level since June 2011, and the yield on 5 year bonds rose to the highest level since October 2008. And this wasn’t just a U.S. phenomenon. We saw bond yields spike all over the developed world on Wednesday, and the mainstream media is attempting to put a happy face on things by blaming a “booming economy” for the bond crash. But the truth is not so simple. For U.S. bonds, Bill Gross says that it was a lack of foreign buyers that drove yields higher, and he says that this may only be just the beginning…
I believe that Gross is right on target.
And Jeffrey Gundlach has previously warned that when yields get to this level that it would be a “game changer”…
For years, it was so easy for bond traders to make money. Bond yields just kept going down, and bond prices just kept going up.
But now the paradigm appears to be completely changing, and an enormous amount of wealth is going to be wiped out.
Normally, a rotation out of bonds is good for the stock market. But when bonds move too quickly that is a sign of panic, and that kind of panic can easily spread to equities. The following comes from Zero Hedge…
In essence, what that is saying is that when bond prices fall this dramatically it usually means that stock prices fall over the following five weeks.
From a longer-term perspective, bond yields are likely to continue to rise because the Federal Reserve seems determined to keep raising interest rates.
In fact, Fed Chairman Jerome Powell says that the low interest rates that we were enjoying during the Obama administration are “not appropriate anymore”…
But Powell knows that every Fed tightening cycle in history has ended in either a stock market crash or a recession.
And he knows that higher interest rates will mean higher bond yields, a stronger dollar and an escalating emerging market debt crisis.
So why is he being so hawkish?
On top of everything else, higher interest rates will also mean higher rates on mortgages, auto loans, credit cards and student loans. The following comes from my good friend Mac Slavo…
This story is not going to end well.
As I have tried to explain to my readers so many times, the Federal Reserve has far, far more control over the economy than the White House does.
It is the Federal Reserve that is responsible for creating “the everything bubble”, and it is the Federal Reserve that will be responsible for ending this bubble.
And when this bubble ends, the economic pain is going to be off the charts. Hopefully the American people will be in a mood to finally shut down the Federal Reserve at that point, because that insidious organization is truly at the heart of our long-term economic and financial problems.
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