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Greece Armageddon, Financial Ebola Sweeps Through Global Bond Markets

Interest-Rates / Global Debt Crisis Apr 30, 2010 - 08:37 AM GMT

By: Mike_Larson

Interest-Rates

Best Financial Markets Analysis ArticleWhat does the end of the bond market world look like? Something like this …


Bond Market Armagenddon Strikes Greece

The chart above shows the yield on the benchmark 2-year note in Greece. Just a few short months ago, Greek sovereign yields were hovering around 2.1 percent. On Wednesday, they shot up as high as 18.9 percent!

Translation? The cost of borrowing for the Greek government — not some subprime mortgage customer or deadbeat credit card holder — shot up almost NINE-FOLD in the span of six months.

During this same time, the price of Greece’s 6 percent 10-year notes due July 19, 2019 plunged from 112.4 to 68.1. That’s a loss of more than 39 percent. Not on some dot-bomb stock … not even on a high-yield, or “junk” piece of paper …

… but on a sovereign government bond!

Folks, THAT is bond market Armageddon. And it’s playing out now. Right on the trading screen of every investor around the world.

Think Greece Is Alone?

Think Again!

Worse, the pain isn’t confined to Greece …

Portugal’s benchmark 2-year note yield just blew out to 4.82 percent from 1.58 percent. That’s a tripling in interest rates in less than a month.

Ireland? Its 2-year yield rocketed to 3.83 percent from 1.62 percent in 23 days.

Even bigger European economies, like Spain, are getting whacked. Yields there recently shot up to 2.08 percent from 1.36 percent.

S&P has cut the debt ratings of several EU members.
S&P has cut the debt ratings of several EU members.

Standard & Poor’s has taken the hatchet to its sovereign debt ratings in response. The agency cut its Spanish debt rating to AA just a day after slashing its Portuguese debt rating by two notches to A-. It also cut its Greek debt rating by three notches to BB+, “junk” territory.

Bottom line: A virulent sovereign debt contagion is spreading like wildfire throughout the euro zone. In the short run, that will likely get the Germans to back down on their bailout opposition.

They’ve been holding up a package that would give Greece up to $60 billion in aid from richer European Union nations and the International Monetary Fund. The crisis may temporarily take a breather if the package gets approved.

But here’s the thing: If the Greeks get bailed out, who’s next? And where the heck is all the bailout money going to come from? Policymakers may need to cough up almost $800 billion to “save” everyone, according to economists at firms such as Goldman Sachs and JPMorgan Chase.

The problem is that nobody has that kind of money laying around! So it’ll have to be borrowed. And if it has to be borrowed … from a European bond market that’s already falling apart at the seams … what’s likely to happen? Even more selling, which would drive bond prices down and interest rates up!

Coming Soon to a Bond Market Near You: Financial “Ebola!”

So far, this is predominately a problem for continental Europe. Our Treasury prices actually rose a bit during the worst of the European debt selling.

But I believe it is woefully ignorant, provincial, and arrogant for us to assume something similar can’t or won’t happen here.

The way politicians are burning through our money, interest rates are sure to skyrocket.
The way politicians are burning through our money, interest rates are sure to skyrocket.

Even the Secretary General of the Organization for Economic Cooperation and Development likened the crisis to the “Ebola” virus, saying “it’s threatening the stability of the financial system.”

When you think it through logically, you can’t help but ask: Why wouldn’t the Grim Reaper eventually come knocking at OUR door?

After all, OUR deficits are out of control! OUR debt level is through the roof! OUR politicians are burying their heads in the sand, just assuming they’ll be able to keep funding their profligacy at rock-bottom rates forever. Those are precisely the same problems that built up in Greece for months on end.

Then one day, the lid blew!

Think about it:

  • Our total debt load is set to double to $18.6 trillion over the next decade,
  • Weekly benchmark Treasury auctions have surged from $20 billion to $30 billion to more than $120 billion,
  • And we’re dumping more than $375,000 in debt onto the market every second in some weeks, all in an effort to fund a budget deficit that’s closing in on $1.6 trillion!

Do I expect a nine-fold rise in U.S. 2-year note yields? A 40 percent plunge in bond prices in just a couple of months? Not really.

But I do believe the bond market will force us to take our fiscal medicine. I do believe a sovereign debt crisis is brewing here. And I do believe it will be just one reason our interest rates will head significantly higher.

So please, invest and prepare accordingly. By the time the bond market bleeding starts, it’ll be too late.

Until next time,

Mike Larson

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


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