Wake up Ben Bernanke has lost control of US interest rates!Posted on 17 July 2013 with 3 comments from readers
The US bond market has quietly slipped into a worse slump than in the Armageddon year of 1994 with bond yields up 40 per cent on benchmark T-bonds since the start of May.
Bond prices move in the reverse direction to yields, so that means US bonds have entered a massive bear market. It matters not very much what Fed chairman Ben Bernanke does or does not telegraph to the markets, they have stopped listening and US interest rates are firmly on the way up.
Higher interest rates
That obviously raises the cost of borrowing for the whole economy, creates huge losses for bondholders and dishes the US housing recovery as seen in the slump in new home starts today.
It will also impact on US equity prices when investors finally wake up and smell the coffee. If you can get a higher yield on bonds then equity dividends look less attractive to buyers and a selling spiral starts.
Higher interest rates are also a tax on business and consumers and both will have less disposable income to spend as a consequence. That’s bad for the economy too.
This is an Indian summer on Wall Street. Markets have been heading higher and higher on an extension of the long rally driven by momentum and ignorance about the key reversal of interest rates.
The recovery, such as it was is now behind us. The reality ahead is a looming plunge into the abyss for financial markets in a repeat of 2008-9. Nobody should expect a smooth rotation from bonds to stocks. Moving to cash or precious metals never made more sense.
US stocks are already flashing overvaluation signals with long-term adjusted price-to-earnings about double fair value. What overshoots in markets has to come back down to earth with a thump.
But what should be really frightening to financial markets is that the Fed has lost control again, just as it did before the global financial crisis. The magic medicine of lower interest rates has actually already gone.
How long before the US markets realize that Emperor Bernanke has no clothes!