The decline in US bonds has been turning into a market's worst-case scenario.
The price drop of 10-year Treasury bonds has reached as much as 46% since March 2020, and 30-year Treasury bonds have reached 53%. This price drop is even larger than when 10-year Treasury yields reached 16% in the 1980s, and it's safe to say it's a literal bond market crash.
Comparing it to stock market crashes, it doesn't fall short at all. During the 2008 Lehman Brothers crisis, the stock market dropped by 59%, and during the bursting of the dot-com bubble, it dropped by 49%. The bond market's decline this time is on par with these historical drops.
As for yields, the 10-year Treasury yield briefly reached 4.83%, and the 30-year Treasury yield briefly reached 5%. Naturally, this will have various implications.
So, in this discussion, I'd like to talk about the impact of rising bond yields, why this rise in bond yields occurred, and also touch on the outlook for the economy.
First, let's talk about the impact of the sharp increase in US bond yields. The biggest impact is on the investors who hold these US bonds. I discussed in a previous video how there's a potential for significant losses, especially for mid-sized US banks, due to the mismatch between these US bonds and MBS (Mortgage-Backed Securities).
US bonds are held by investors all over the world, but mid-sized US banks, in particular, may be facing substantial losses due to the significant mismatch between their assets and liabilities.
Another concern I have is regarding corporate financing. In February of this year, Rakuten issued bonds in the US junk bond market with yields exceeding 12%. If they were to issue bonds now, the yields would likely be even higher. This means that companies issuing bonds in the US bond market might face significantly increased financing costs. While I used Rakuten as an example, the impact on their business may not be significant because the amount they issued in the US junk bond market was relatively small. The real issue lies with US companies with lower credit ratings.
According to data compiled by Bloomberg and others, there are approximately $1.6 trillion worth of bonds in the US junk bond market set to mature by 2029. To break it down further, in 2024, it's $963.5 billion, in 2025 it's $2,206.5 billion, and in 2026 it's $329 billion.
The deterioration of corporate finances typically happens when the timing for refinancing arrives, and they are unable to refinance due to the significantly increased financing costs, which can lead to a worsening of their financial positions. Therefore, the negative effects of the current rise in interest rates may not become apparent in terms of deteriorating corporate finances until some time in the future.
Additionally, it's expected that mortgage rates and credit card interest rates will also rise, and there may be shifts in funds from the stock market to short-term bonds, among other negative impacts on the economy.
Now, let's delve into the reasons behind this rise in yields and the complexities of interpreting economic trends. A significant factor contributing to the rise in US bond yields is the expectation that the US economy will continue to perform well, driven by strong employment and consumer spending. The Federal Reserve's stance of keeping policy rates higher for longer also plays a role in this yield increase.
However, there's also the influence of people's perception of the economy. The more optimistic people are about the economy, the higher the yields tend to rise, which can paradoxically lead to economic downturns. This underscores the complexity of the relationship between people's sentiments and economic outcomes.
The actions and statements of influential individuals can have a substantial impact on market sentiment and, consequently, on economic trends. Therefore, those with influence in the market need to carefully consider how their statements may affect the behavior of market participants and the broader economy.
In this context, it appears that many people have become overly optimistic about the US economy, reacting to the springtime rebound from earlier excessive pessimism. This optimism has contributed to the rapid rise in interest rates, which, in turn, threatens to have significant negative consequences for the economy.
In conclusion, when examining economic trends, it's essential to consider not only economic fundamentals but also the collective mindset of individuals. This episode has highlighted how the optimism or pessimism of the public can significantly influence economic outcomes. Today, we discussed how the substantial increase in interest rates in the US bond market may negatively impact the economy and the reasons behind this surge, emphasizing the role of people's sentiments in shaping economic direction.