by Chris Black
UST international holders have been net sellers since 2020, but really late 2021, and the bond markets crashed.
The main leaders were the oil producers. As a result of market force alone, yields were 2% up on the 10 year UST and as such interest rates on mortgages were up 2 1/4%. The biggest Fed headache is that they need to raise rates while not collapsing the bond markets.
BUT, if international bond holders keep selling and bonds keep crashing, the US dollar is completely screwed.
Banks are over-leveraged from QE.
While Fed rate hikes affect lending prices, commercial banks get the cash for mortgages from US bond markets (and not only in the US, Canadian banks do as well).
They also never fixed the real cause of 2008 which is adjustable mortgages, so we are in the same exact situation.
Now the Fed did a massive bailout of corporate America in 2020 via the corporate bond markets (that after a Q4 2019 bailout of the banks via the repo markets), essentially causing a 20% devaluation of the USD in 6 months with 5 trillion+ in new debt created.
And the pain was then spread with the BOE, BOC and ECB all doing the same in a sort of hidden “revaluation” of currencies to the USD.
That’s why the whole western world is drowning in inflation.
The Fed thought they could use the petrodollar system to export the inflation, but the system cracked as they had stupidly done the bailout in an oil crash with low oil demand environment and everyone started bailing out on the USD outside the West.
Plus, oil and gas started being sold in other currencies in 2019 making the problem 1000 times worst.
The inflation cannot be fixed in the short term or even medium term and they will let that run rather than causing bank failures by raising rates too fast.
But banks will still be in trouble because of the crash in UST markets.
Fun times ahead.
Deflationary Tsunami On Deck: A “Tidal Wave” Of Discounts And Crashing Prices t.co/LXsNn7vrB7
— zerohedge (@zerohedge) June 17, 2022