Long Bonds, High Yields
Globally, 30-year government yields are breaking into record territory
The bond vigilantes are waking up, as we discussed last week. And long-term interest rates, used by governments and companies to fund investment, are moving higher as the Bloomberg chart shows.
The yield on Japan’s 30-year and 40-year bonds has already hit all-time highs. Yields in other major global markets are also rising.
JAPAN’S HIGHER RATES ARE STARTING TO IMPACT US STOCK MARKETS
Figure 1: Rising gap between USDJPY and US yields a sign of rising fiscal risk
The issue is that global bond markets are all connected. This was great for US markets when global rates were going down.
But now that pattern is reversing, as the Deutsche Bank chart shows. In turn, this is pressuring US markets. The US 10-year Treasury rate is already back to 4.5%.
The reason is simply that Japanese and other investors no longer need to operate what became known as the ‘carry trade‘:
- This involved investors borrowing at low rates in Japan
- They then invested this money at higher rates in the US
- And as the Japanese currency kept weakening, they needed fewer dollars to repay the yen loan
But today, this $350bn ‘carry trade’ is coming to an end. So money is flowing out of the US and back to Japan.
US MORTGAGE RATES ARE RISING
Monthly mortgage payment on a new mortgage currently $2965
Long-term interest rates have a major influence on the rates we all pay for mortgages, auto loans and other borrowing.
When rates were low, consumers had more money to spend. And so the economy did well, as consumption is 60% – 70% of GDP in most developed countries.
But today, as Apollo’s chart shows, rates and interest payments are moving higher, much higher:
AUTO LOAN RATES – AND REPOSESSIONS – ARE ALSO INCREASING
Auto Repossessions Increase in Past Year
Vehicle seizures are at the highest level since 2009
Auto loan rates are also increasing. The US rate for a new car loan is currently 9.4% according to Cox Automotive. And for used cars, it’s 14.2%.
Experian reports the average payment is now $742/month for new cars and $525/month for used cars. And auto insurance costs are also rising, to an average $2304/year.
Unsurprisingly, as the Bloomberg chart shows, car repossessions are also rising. Last year, they were at the highest level since the 2008 subprime crisis, with 1.73 million vehicles seized.
Delinquency (or missed payment) rates are also rising, with the New York Fed reporting they are now above pre-pandemic levels.
Borrowing makes a lot of sense when interest rates and inflation are low. But now, both are moving up again to more normal levels. This will increase default risk, as companies and people with too much debt find it more difficult to make their repayments.