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Bonds, Banks, & Bears
Submitted by Alasdair Macleod via GoldMoney.com,
This year has seen some big losses develop in the bond markets, though prices have stabilised in recent days.

The chart above is of the yield on the lowest investment risk in ten year maturities. Most other 10-year bonds have seen even sharper rises in yield (i.e. greater price falls). This matters because the banking system is heavily invested in sovereign bonds, not only in the short end of the market where it traditionally invests its liquidity, but also in longer maturities between five and ten years. Furthermore, central banks have become exposed to the same risk through their bond purchases with implications for currency stability, but that is a separate issue.
The primary reason for today's excessive duration mismatch between short-term deposits and bonds of longer maturities is zero interest rates. Banks simply cannot make reasonable returns by buying shorter maturities, and they are encouraged by banking regulations to pick up a little more yield by buying longer-dated government bonds instead of lending money to customers who are categorised as riskier. The result is banks have suffered substantial losses in recent months, most of which have been in the current quarter.
The table below summarises the losses seen in the larger sovereign bond markets at the worst point last week, and it is noticeable how badly Eurozone government bonds were hit.

This is a separate but related issue from Greece, which is worrying enough in its own right, because the write-offs at the ECB from a Greek default will exceed the ECB's shareholders' capital.
It is worth bearing in mind that Eurozone banks are closely tied in with their national governments, and are expected to take the lead in funding them. Furthermore, Basel Committee regulations make this easier by treating sovereign bonds as preferred investments. So imagine the losses faced by the average Italian or Spanish bank, when their national bonds fell by these amounts in the space of six weeks, particularly when their bond holdings exceed their tangible shareholders' funds by a multiple factor. Even German banks were badly hit, not to mention the French and Eurozone banks in other countries not listed in the table. Unless the current recovery in bond prices holds by the end of this month, these banks could be forced to record systemically destabilising losses at the quarter end.
This is not all. The general assumption has been that in the absence of price inflation central banks are in control of bond markets, so these losses were not meant to happen. Instead it is becoming apparent they have become trapped by their own monetary policies, with no remedial action that will not destabilise markets. Furthermore, as I pointed out recently, with inflation being under-recorded in official statistics bond prices were and still are far too high, so further falls can be expected.
The markets are telling us that the bond bubble may be in the early stages of imploding. We can take the general media silence on this issue as evidence that investors were caught unaware, but central banks should be alert to the dangers. Recent talk about normalising interest rates has been inspired by a need to control valuation excesses, which should now be replaced by attempts to prop up bond prices; so talk of the Fed raising interest rates should now fade. And while Chairman Yellen in yesterday's FOMC* statement could not admit this, she effectively confirmed it by sitting firmly on the fence.
History tells us two related facts. Central banks are always defeated by markets in the end, and central bankers have a touching faith that next time they will retain control over markets. But if we accept the lessons of history, we must dismiss complacency over systemic risk to the financial system. We can go even further, and begin to expect that of all the risks that will eventually trigger a widely expected financial crisis, it will be an old-fashioned bear market in bonds.
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bear market in bonds? financial engineering and those in power say no.
Don't kid youselves...these F&^*ers NEVER lose...until they die
And that could be arranged......
"Central banks are always defeated by markets in the end . . ."
LOL!
Too funny. Central banks have been wiping the floor with markets and will continue to do so. They're not capital constrained. Get it?
Add Alasdair Macleod to my list of morons.
The banking system & markets will go down, it's part of the plan, and how the government plans to steal deposits, pensions, and usher in Cashless Societies / Digital Banking (Read Terrorism)...
There are two and only two classes of people:
1. Those who create money
2. Those who cannot create money
In a barter society, everyone can create money through their labor. In a fiat society, not-so-much.
The whole meme of elitists who do not have the ability to create money is a farce. They are the pets of the banking powers who create money, and ultimately dependent on them.
it will be an old-fashioned bear market in bonds.
Bonds have been levitated by Central bankster lies about inflation and prospects for future inflation. And considerable Central Bankster buying.
Just look at how we fix inflation in the land of the free:
Chapwood Index shows real inflation in US.
In 2014, it was 9.7% - 1212% of official US inflation (0.8%)
http://www.chapwoodindex.com/
Inaccurate Statistics And The Threat To Bondswe are being badly misled into believing that the US is teetering on the edge of price deflation, because the US official rate of inflation is barely positive, a level that US bonds and therefore all other financial markets have priced in without accepting it is actually significantly higher.
http://www.zerohedge.com/news/2015-05-29/inaccurate-statistics-and-threa...
"When shorting and selling bonds and stocks are made illegal the markets can only go up." -Chairgnome Yellen
'xactly
"Unless the current recovery in bond prices holds by the end of this month, these banks could be forced to record systemically destabilising losses at the quarter end."
I think you may be overstating things just a bit.
"This is not all."
Actually, I think it is.
"Central banks are always defeated by markets in the end, and central bankers have a touching faith that next time they will retain control over markets"
Yes, but you are clearly failing to to grasp the concept of 'it's different this time'.
Three words this guy missed.... Mark to Market
You'll have more luck finding unicorn poo than a bank taking a 'loss' on sovreign debt
We have a winner!
The Fed has done its damage and is now mostly irrelavant. With routine swings of over 1-2% in most all things financial a .25% Prime increase here and there will have little impact as it's now charades. Real people will pay the price again with losses (now just slow bleeding) in 401Ks and savings (interest rates on savings will change little as no one is/will borrow). You may partially protect yourself but this will unravel.
garbage
Fucking Bullshit! I would wish it was true, but it's just not.
"Central banks are always defeated by markets in the end, and central bankers have a touching faith that next time they will retain control over markets."
Sounds just like the oil man's prayer: "Lord, please, just one more gusher, and I promise I won't blow it all this time."
Good article but the facts may not support the conclusions. The reality of it all is that we won't know what caused the crash until it's over. Maybe years afterwards. But it will crash and hard.
"Central banks are always defeated by markets in the end."
And yet, somehow central banks still retain power in the end. I would argue that central banks are never defeated by markets. Central banks just allow the markets to do the heavy lifting for a time... and pretend that they have been defeated by powers outside their control. If this was not the case, then we would not have as many and as powerful central banks as we do now.
I suspect a "power outside the central banks' control" will once again re-set things... and the central banks will still remain in power.
It is true that in the case of runaway inflation black markets develop. Black markets are free markets, but difficult for people to manage. It is also true that in cases of massive deflation some banks are closed or consolidated ... only to be replaced by new bigger and more powerful banks.
Central banks being defeated by any means other than wholesale slaughter of the central banking powers and being replaced by governmental banks is a myth propagated by banks.
Unless the current recovery in bond prices holds by the end of this month, these banks could be forced to record systemically destabilising losses at the quarter end...
And please, pray tell, what's to prevent the beloved Basel "agreement" to be rewritten yet again?
Those that write the rules get the gold.
jmo.