February 16, 2021
As we kickoff another week of trading in what has been a wild 2021, a great danger is threatening the stability of the global financial system. For each one percent rise this will cause a staggering $3 trillion in mark-to-market losses.
Staggering Mark-To-Market Losses May Unfold
February 16 (King World News) – Peter Boockvar: As long term interest rates continue higher globally amid mass inoculation optimism, rising inflationary pressures and commodity prices and higher inflation expectations, because of the massive amount of debt outstanding and record high duration levels, the impact can be quantified. Bloomberg recently estimated that on a pile of $35 Trillion of bonds in the Bloomberg Barclays Global Aggregate Treasury Index, for each one percentage point increase in yields, there would be a $3 Trillion mark to market loss of value…
ICE Data last Monday said that the average duration of US corporate bonds stood at 8.3 years vs 6.5 ten years ago and 5.6 twenty years ago. For high yield specifically where the average yield is now below 4%, the average duration is now at 6.7 years according to Barclays vs 6.1 one year ago. Thus, we’ve never been so sensitive to changes in long term interest rates than we are now.
This as investors continue to pile in because of the search for yield and they are taking on more and more credit risk as well as rate risk in order to find it. In today’s front page of the FT, “The riskiest borrowers in corporate America are making up their largest share of junk bond sales since 2007 as yield starved investors hunt for returns and bet on an economic recovery. More than 15 cents of every dollar raised in the US high yield bond market has been sold by groups with ratings of tripe C or below since the start of 2021, a FT analysis of Refinitiv data shows.”
Another way to look at the rise in yields in the US, regardless of why, the long end of the US Treasury market has essentially hiked rates by almost 75 basis points since the yield low in August. At some point if long rates continue to rise and things start to break, we’re going to have an epic still cage match between central bankers and markets and we’ll see if the former wants to fight the latter in terms of control.
The other thing of note today is the US dollar index which is further breaking back below its 50 day average with the index falling close to 90. The big picture trend remains down, especially with the US government having absolutely no sense of financial prudence at the current level of debts and deficits.
We do get flooded with Fed speak this week and the theme will remain the same, ‘we’re still focused on the covid fallout, we want higher employment and inflation and we’re monitoring markets but don’t care about excesses.’ We’ll see, if asked, what they say about the rise in long rates which implies in part that they are too loose on the short end.