The 5% Bond Market Means Pain Is Heading Everyone’s Way - BNN Bloomberg

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The impact will be felt in everything from shoppers’ pockets to company balance sheets

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“I struggle to see how the recent yield moves don't increase the risk of an accident somewhere in the financial system given the relatively abrupt end over recent quarters of a near decade and a half where the authorities did everything they could to control yields,” said Jim Reid, a strategist at Deutsche Bank AG. “So, risky times.”

Finally, governments issued a lot more debt — at low rates — during the pandemic to safeguard their economies. Now they have to refinance that at a much costlier price, sowing concerns about unsustainable fiscal deficits. Political dysfunction and credit rating downgrades have added to the headwinds.

The mortgage-cost squeeze is a story playing out everywhere. In the US, the 30-year fixed rate has surpassed 7.5%, compared with about 3% in 2021. That more-than-doubling in rates means that, for a $500,000 mortgage, monthly payments are roughly $1,400 extra.Higher rates mean countries have to shell out more to borrow. In some cases, a lot more. In the 11 months through August, the interest bill on US government debt totaled $808 billion, up about $130 billion from the previous year.

Ultimately, as governments try to be more fiscally responsible, or at least give that impression, the burden falls on households. They’re likely to face higher taxes than otherwise along with suffering financially strained public services.US Treasuries are considered one of the safest investments on the planet, and in the last decade or so the rewards for holding them were modest given suppressed yields.

Such strains could mean corporates have to scale back investment plans or even look for savings, which may translate to job losses. Such actions, if widespread, would have implications for consumer spending, housing and economic growth. In the absence of cheap debt to help boost returns, some firms, including giants like KKR & Co., have been writing bigger equity checks to get deals done, while others have been opting for minority stake purchases. At the same time, PE firms have found it harder to sell assets, leading to delays in returning money to investors and impacting their ability to raise new funds.

While a broader turmoil could emerge from anywhere, it’s worth noting that property crises have frequently been the germ for a wider banking crisis.Lately, both bonds and stocks have been going down. That’s not ideal for defined-benefit pension funds that tend to use the classic 60/40 strategy, of 60% equities and 40% bonds.

 

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