"more turmoil in the bond market because “there is $50 trillion more in world debt today than there was in 2018.”
Larry McDonald, founder of The Bear Traps Report and author of “A Colossal Failure of Common Sense,” which described the 2008 failure of Lehman Brothers, expects more turmoil in the bond market
The bond market dwarfs the stock market
Pointing to the bond-market turmoil in the U.K., McDonald said government bonds with 0.5% coupons that mature in 2061 were trading at 97 cents to the dollar in December, 58 cents in August and as low as 24 cents over recent weeks.
Investors haven’t yet seen the financial statements reflecting those losses — they happened too recently.
The yield on 10-year Treasury notes has risen considerably as the Federal Reserve has tightened during 2022, but it is at an average level if you look back 30 years.
McDonald said that interest rates didn’t need to get anywhere near as high as they were in 1994 or 1995 — as you can see in the first chart — to cause havoc, because “today there is a lot of low-coupon paper in the world.”
“So when yields go up, there is a lot more destruction” than in previous central-bank tightening cycles, he said.
McDonald expects the Federal Reserve to become concerned enough about the market’s reaction to its monetary tightening to “back away over the next three weeks,” announce a smaller federal funds rate increase of 0.50% in November “and then stop.”
MarketWatch 12 October 2022
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