Global Sovereign Bond Markets Near Collapse

Last week we drew attention to the effect of central bank interest rate increases on the banking system, and in particular to the devaluation of bank assets as a consequence of higher yields on government bonds. The rise in yields is ascribed to inflation fears and to increased government debt, i.e., an increased bond supply on the market – both of which are a consequence of central bank policies.

As bond yields rise, the market price for existing bank assets depreciates which, for U.S. megabanks, means “unrealized losses” (that is, what they would lose if they sold the bonds) of over half a trillion already, as we reported earlier. Add this to the losses due to the contraction of the real economy.

In its Oct. 3 letter to subscribers, Goldman Sachs warned of the consequences of the global bond selloff. “A sharp rise in long-term interest rates combined with widening deficits and heightened fiscal discord in Congress have renewed questions about the sustainability of rising government interest costs.”

Behind the banking lingo is the warning that the system has reached the end of the road. Italian financial analyst Mauro Bottarelli translated it as: We are at “The redde rationem [point of reckoning] to the wonderful world of perennial QE”. The message is that “the Fed must go back to monetizing the big gambling casino exposed by Goldman and responding to the US debt/deficit ratio.”

The fact of the matter is that in one single day, U.S. yields added $275 billion of new debt to the old, and the U.S. debt stock is now set to grow by one trillion a month. “If the alternative is the total collapse of the stock and bond markets, do you still think that [inflation] is a problem?” According to Bottarelli, we are close to seeing once again “Debt monetization, direct financing of the deficit and yield control policies with purchases that disintegrate any remnants of price discovery and fair value. (…) The tow-truck of the global printing house will come to rescue governments, banks and zombie firms.” That is exactly what EIR has warned about, when central banks began their “quantitative tightening”.

In its letter one day later, on Oct. 4, Goldman Sachs focused on the “fault line” in the Eurozone, namely the sell-off of Italian bonds. “This has coincided with a deterioration in fiscal fundamentals in Italy, with the debt-to-GDP ratio now likely to be on an increasing path in coming years.”

However, the increase of Italy’s debt-to-GDP ratio is in part due to a debt-trap laid by the EU, in the form of the famous “Recovery Fund” loans. Italy has been earmarked €191 billion in loans and grants, of which it has already received 35.6 bn (in loans only). Since the government has announced a €38.5 billion increase of the three-year budget, it is evident that the “deterioration in fiscal fundamentals” corresponds at least partially to the new debt borrowed from the EU.

The previous governments (Conte-2 and Draghi), that had borrowed that money, cannot even claim it was for productive investments: the Italian “Recovery Plan” has a cumulative multiplier of 0.9, based on the government’s own calculations! In other words, the EU, while loudly denouncing China’s non-existent debt trap, laid a huge debt trap against its own member countries.