It peaked at USD 1.7 trillion in 2016, declined rapidly this year and will decline to minus US $ 500 billion by 2019 as the ECB will stop bond purchases and the Fed will reduce its portfolio by $ 50 billion per month. "There will be a shock," said Mr. Coulton. The 10-year US Treasury rate rose yesterday to a peak of just 3.22 percent yesterday after Mr. Powell said the US economy was firing on all cylinders and giving fire-spitting comments on interest rates. "We can go beyond neutral," he said. "But we are far from neutral at this point."
Pepperston Group said that a move of this size is a very rare phenomenon, & # 39; is for the American Treasury market. Contamination immediately spread through the global debt nexus. German Bunds swung higher, like Japanese long bonds, with domino effects by corporate credits.
Mr Powell's language suggests that Fed officials fear that they are behind the facts and must step up the pace of tightening. The ISM services index rose to a highest point ever of 61.6 in September. President & # 39; s Trump & # 39; s stand-out infrastructure has suddenly begun to flow, at the exact time of the economic cycle.
Christine Lagarde, the managing director of the International Monetary Fund, said that rising yields were a wake-up call for over-leveraged companies and countries that depend on a constant inflow of foreign funds. She said that global debt has risen by 60 percent since the previous financial crisis to $ US182 trillion, and this is likely to be tested. "The climate of the global economy is starting to change," she said.
US bond yields are rapidly rising over the "interest rate curve" of all maturities. This implies that "real" returns have suddenly come off. This poses a threat to high-debt "zombie" companies that are shielded by QE.
"It could be a problem for the periphery of the euro zone and for weaker emerging markets," said Mr. Coulton. "Central banks have compressed the spreads in recent years and now it's all going down."
The combination of a rising dollar and rising US interest rates is painful for those countries in Asia, Latin America and Africa that have relied heavily on dollar debt.
Morgan Stanley's emerging market index (EEM) fell 2.7 percent yesterday, led by the usual suspects from Turkey, Argentina, South Africa and India. It has now given up all profits from the past 17 months.
Nobody knows where the pain threshold is when interest rates rise for US 10-year Treasury bills, considered the benchmark price of global money. Bob Baur of Principal Global said the danger point is almost 3.5 percent. "That will be a real problem for the stock markets."
Bill Gross, the "bond king" at Janus Henderson, said that an interaction of complex global forces pushes revenues higher. A shift in what is known as the & # 39; cross currency basis & # 39; has lifted the currency hedging costs for European and Japanese investors with US bonds. This makes it more attractive to repatriate the money until US debt offers a better return. "Euroland, Japanese buyers are priced out of the market," he tweeted.
Mr Coulton said that the narrowing of the ECB's bonds is now entering with an extra kick. A large part of Europe & # 39; s QE leaked to the US debt markets and yields declined. This current will soon be completely cut off. Americans will have to pay higher costs to finance Mr. Trump's deficits and their borrowing habits.
The wild card is how Japanese $ 3.4 trillion US life insurers will respond to higher hedging costs. This industry is a global colossus and can create ripple effects in the global financial system, although it is only maintained by specialists.
Daniel Sorid of Citigroup said that the 30-year yields in Japan are almost 1 percent. This threshold can cause a major change in behavior, perhaps because these companies adjust their portfolios before the new fiscal year in March.
What is clear is that the age of easy borrowing is over the whole world. We will have to live within our means.