This was an important week in global markets. Long-term government bond yields showed early signs of a "disorderly" climb, not so much because of any improvement in the economic outlook, but concerningly, as investors seem to be testing how high rates need to go in a high-debt, high-deficit landscape where the key buyer of government bonds last decade (central banks) has vanished from the scene.
Central banks altogether bought $23 trillion of assets (primarily government debt and U.S. mortgages) in the past 15 years, according to Bank of America's Michael Hartnett. That "liquidity supernova" caused "big asset price inflation...and in recent years subsidized massive U.S., U.K., and European government spending," he wrote yesterday.
Now, that excess is unwinding. I'll write more next week on what Hartnett thinks the financial landscape for the next decade will look like (hint: among other things, he thinks it requires changes to the typical 60/40 portfolio, which Apollo's Torsten Slok today noted has lost 5% over the past two months as both stocks and bonds have sold off in tandem, and Slok worries its outlook "remains negative").
So how did we get here? Here's a recap of the pieces that examined that issue this week.
Monday: The $2 trillion deficit. How did we get here?
Tuesday: Will the deficit require the Fed to restart QE?
Wednesday: When will markets force Washington's hand?
Thursday: If bond yields don't start dropping...
Friday: The sovereign debt bubble is bursting.
And if you really want to take a deeper dive, check out CBO's writeup (from February) of the U.S. fiscal picture for the next ten years. You can see why markets are getting jittery.
Have a great weekend, and see you on Monday!
Kelly
