The financial world upside-down: debt failure closer

World financial markets in the Intensive Care Unit being treated with…free cash. The French yellow vests have understood it. (Unsplash photo, by Norbu Gyachung, Paris France).

A round $10 trillion worth of bonds are currently being traded in world markets on negative interest rates. At the same time, the European Central Bank prepares to flood the Eurozone and the banking world with hundreds of billions of zero interest rate euros, in an abrupt change of monetary policy course from restrictive to accommodating.

No wonder then, why the yields curve of the American government bond yields is reversed, meaning the US Treasury can borrow at lower interest rates for ten year maturities than it has to pay for its three month government bills. The last time a reversal of long/short term borrowing cost/yield occurred was in 2007, just before the Wall Street stock market meltdown. The yield of a fixed income (coupon) generating bond falls when its price rises. Bond are considered as safe haven in times of uncertainty.

Free money for banks

The US Treasury’s yield curve inversion doesn’t necessarily mean a new Armageddon is around the corner. It will press, however, the American central bank, the Fed, to complete its own monetary policy U-turn and again start lowering its interest rates, hastily passing from lending cost increases, to decreases. As for calling back the $4.5 trillion it has printed and distributed free of cost to the American banks during the past years, there is no question any more. Capping is also forgotten as is the interest rates normalization.

Last Friday, apart from the bond yields curve reversal in US markets, the German ten year bond was sold and bought deep in the negative part of the chart. At the end of that day, the ten year ‘bund’ yields closed at -0.029, meaning investors will receive less after ten years than what they paid today to buy a German ‘bund’. The same is true for the Japanese government 10 year bonds. Like it or not, this is the financial environment we have to live in for many years on. Jerome Powell the head of the Fed, and Mario Draghi President of ECB both tried to restore some order in the global financial system but were blocked by reality.

Feeding the Mammoths

The financial Mammoths are not able to survive in case they are obliged to pay anything for the incredible leverage they have got or return a small part of what they owe to central banks. The world is twice more indebted now than in 2007 and nobody can say who is able to pay back on settlement day and who not.

In short, ‘blessed are the indebted’ but not the real everyday people. These last borrowers will lose their car, their home or go to jail if they don’t pay on maturity day. Only the financial Gargantuans can borrow from the central banks for free and never pay back. But what if one of them has overdone it, like the Lehman Brothers?