Central bankers have long been fretting over what might happen if incipient inflation and gargantuan debt issuance starts to set off an exodus from global bond markets. They had their first real taste late on Thursday.
This amounts to a stress test for a financial system that has never been so leveraged to even minor moves in borrowing costs.
Pandemic bailouts have pushed global debt to a new peak of 355pc of GDP, according to IIF data. Offshore dollar debt has jumped to $12 trillion. Emerging markets have borrowed exuberantly in a currency beyond their control.
The Bank for International Settlements warned long ago that central banks are sliding ever deeper into a “debt trap” and that it would be extremely hard to find a way out.
These concerns were invariably brushed aside as a problem for the future.
That future has arrived.
Ambrose Evans-Pritchard Telegraph 26 February 2021
Humbling’ week in bond markets leads to fears of paradigm shift
Bonds remain strong in historic terms. But for the typically staid and steady US government debt market, that scale of move is rare. The incident has rekindled memories of chaotic scenes in Treasuries just under one year ago
US sovereign bonds are considered to be the deepest, most liquid market in the world. But on Thursday, that market wobbled. “It was big,” wrote analysts at Rabobank. “It was almost as if a dam broke.”
FT 26 February 2021