Fitch Sees $3.8 Trillion Of Losses For "Investment-Grade" Sovereign Bond Investors

Tyler Durden's picture

As we recently pointed out in a post titled "Why The Fed Is Trapped: A 1% Increase In Rates Would Result In Up To $2.4 Trillion Of Losses," international monetary policy, which has consistently lowered short-term interest rates in a effort to reflate economies by pushing investors into risk assets, has unwittingly created yet another massive bubble in the long-end of investment-grade sovereign debt.  In our previous post, we pointed out that the artificially low short-term rates, while succeeding in creating a massive equity bubble, also served to push yield-hungry investors (skeptical of inflated equity valuations) into the long end of the curve, a fact that will result in substantial losses for those investors when interest rates ultimately revert back to long-term means.  Our analysis concluded that a 100bps shock to interest rates could result in market value losses of $2.4 trillion.

In an article posted today, Fitch agreed finding that a reversion of rates to 2011 levels for $37.7 trillion worth of investment-grade sovereign bonds could drive market losses of as much as $3.8 trillion. Fitch noted that unconventional monetary policies in Japan, Europe and the US, together with a surge in investor demand for safe assets, pushed sovereign yields to new lows in 2016, with $11.5 trillion in sovereign securities trading at a negative yield as of July 15.  An analysis of yields by maturity pointed out that the long-end of the curve has contracted by ~250bps over the past 5 years.

Sovereign Bond Yields

Fitch also pointed out, as we did, that losses would be greatest for European issuers where yields have contracted the most in a flight to "safety" and duration has been stretched as government issuers take advantage of low rates to stretch out maturity profiles and investors reach for yield.

Sovereign yields for European countries, particularly Italy and Spain, declined significantly since summer 2011 as Eurozone credit risk remained high during that period. If yields in these countries returned to July 2011 levels, the market loss on their debt would be 21% each.


Additionally, the UK's relatively longer maturity stock of debt outstanding would drive total market losses of 19%. For debt with 25 or more remaining years to maturity, investors in European countries would lose 44% in market value on average in this scenario.

At some point in the future we suspect investors are going to wake up and realize that lending money to insolvent "investment-grade" sovereign entities for 30 years at 1.5% probably isn't adequate compensation for the risk being taken.  We suspect that realization may only come once it becomes painfully obvious that these countries have amassed trillions in debt that can only be repaid by massive currency devaluations and rampant inflation.  Until then, we're sure that everyone will just keep their heads in the sand and continue to play the "greater fool" trade.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
SomethingSomethingDarkSide's picture

And that's a "Stress Test" from a source with a lot of skin in the game!  Imagine what it will actually be..

City_Of_Champyinz's picture

Sometimes settling for a 0% return while keeping your powder dry and safe is the best course of action...These 'yield starved' investors are greedy as hell and seemingly willing to risk it all for a percent or two of profit.  They deserve to get destroyed.

wakablahh's picture

What about insurance companies and other gov entities that need to invest in longer maturities to match duration with their liabilities?

wildbad's picture

insurance companies here in euroland are fucked.  they can no longer sell policies on the basis of decent payouts.  my wife is cashing in this year on policies that were written in the days of near 10% rates.  plenty of people getting good payouts these days but the ponzi pipeline is just not being stuffed anymore and this has got to tear on their bottom line.


who's following that risk?

RaceToTheBottom's picture

Yep, we need Insurance Company reparations.


Manthong's picture


At least it’s not over $4 Trillion

shovelhead's picture

That money has to go somewhere.

Let's see ...Should I go with Detroit munis or Italian banks?

DocBerg's picture

I think that most munis are just as bad as those two options.  When I worked in city administration, one of my recurring nightmares was our bondholders actually wanting their principal back.  There was no way that we could come up with that much money.  There are plenty of other local governments in the same fix.  Then, there are the school districts who are head over heels in debt, with a declining property tax base, and worsening demographics.  This won't end well.

sun tzu's picture

How about silver and gold? You don't have to worry about defaults and losing 90% of your investment.

Consuelo's picture



 Expectations were never realistic to begin with - they were all projected out on a rising curve of never ending asset $appreciation.    It all comes back to easy credit and the artificial expansion that it begets.



wildbad's picture

4T seems acceptable

Cognitive Dissonance's picture

We've only just lose.

Consuelo's picture



 No 'white lace & promises'...?  

Soiled garters and damned Lies...?

CPL's picture

Considering they've collectively printed around 40 trillion out of thin air, 4 trillion is nothing.  They'll just print another 40 trillion to make up the difference.

knukles's picture

That's interest rate risk.  Price goes down.
Then ya getta worry about whether ya gets paid ... that's default risk
And of course, ya get the 4X risk.  Most of which you don't know about because you're buying dollar denominated stuff.  yeah, but the issuer has to pay in his local currency to get the dollars to pay you to...
So many things to consider....
So few lives...

Preacher Jesse Custer 2016

Frankly my fair weathered friends, anybody buying emerging market anything these days is bat shot crazy.  There's already a whole universe of overpriced good quality stuff to buy.

wisehiney's picture

Auto sales down 3%.

Nominal rate on bond 1%

Real rate 4%

Tell them to wake up knuks!

knukles's picture

I keep tryin' my brother, I keep tryin'!
But this is a #idontwannalistenyo type topic.
They're doing great this year.
Between my long T's and Gold, I'm a happy camper.

Cognitive Dissonance's picture

There's an old sayin' about pissing in the wind.

You must stink pretty bad by now Knukles. :-)

knukles's picture

That sir, I do.
Interesting twist to it is that it's only noticed by new people.  My old friends have quit calling me crazy and piss right alongside me now.
Or at least don't wonder WTF I'm doing. 
Love ya' Cog

PontifexMaximus's picture

They found out only now? Well done!

wisehiney's picture

Trying to scare you off of your Tbonds.

Go ahead and chicken out.

I am waiting to take them from your little weak hands.



knukles's picture

Now, T Bonds, I'm long bunches and bunches, gobs and gobs, oodles and oodles, and I mean "The Long Guys"
Because if TSHTF, then one of the first realities will be the flight to quality, and they'll be none to be found at none to be found prices.

Rainman's picture

I hear that all .gov-authorized  paper can be traded for an extra cup of gruel in the FEMA camps

wisehiney's picture

Too late for the camp registrar!

Already converted to gold.


Hohum's picture

What difference does it make?

BandGap's picture

That headline....3-5 years ago.....utter chaos. Seriously.

These days no one knows what to do or say. 3.8 TRILLION in losses for fuck's sake, with government (pick your flavor) bonds. 

This is the best show on TV, er, the interwebs.

Theos's picture

Where is the risk if they can print the money to pay the debt?

sun tzu's picture

Only if they devalue one at a time, which destabilizes the currency markets and global trade. If everyone devalues at the same time, it will be a slower crash. 

Infield_Fly's picture
Infield_Fly (not verified) Aug 2, 2016 3:11 PM

"Why The Fed Is Trapped: A 1% Increase In Rates Would Result In Up To $2.4 Trillion Of Losses,"


Therefore a 0.25% increase in rates (more realistic) would result in $2.4T / 4 or $600B of losses.


And the Fed has been selling all the way up.

ironicmerman's picture
ironicmerman (not verified) Infield_Fly Aug 2, 2016 3:24 PM

Wow, someone really brushed up on division!  You're assuming it's a linear path, which may not be the case, professor math.

wisehiney's picture

Tbonds will be the LAST paper to burn.

Yes they will, but LAST.

You see all of that debt is denominated in dollars.

Gotta have em to pay your bills.

But please, do use your tbond profits to buy the only thing that will not burn,

Or collapse into a digital pile of nothing.

ejmoosa's picture

$3.8 trillion? The Fed could monetize that in a few milliseconds.

ironicmerman's picture
ironicmerman (not verified) Aug 2, 2016 3:22 PM

1. You're quoting a credit rating agency.

2. Among the three major chose FITCH???  They're the biggest joke amongst the three.  Is that Lord Donald's favorite?

N0TaREALmerican's picture
N0TaREALmerican (not verified) ironicmerman Aug 2, 2016 3:30 PM

Ok,  #2 would try harder.   Wouldn't #3 try even harder?

ironicmerman's picture
ironicmerman (not verified) N0TaREALmerican Aug 2, 2016 3:36 PM

You'd think so, but they just ripped off S&P's rating scale.  That's why a lot of corporate issuers just get rated by Moody's and S&P but skip Fitch.  Sad!

trollster's picture
trollster (not verified) Aug 2, 2016 3:24 PM

Bernanke said "not in my lifetime"

Do you expect him to die soon?

spanish inquisition's picture

Looks like we are moving closer to hostile sovereign M&A's to clean up the books

Spungo's picture

Why does Fitch think central banks would let interest rates rise? That doesn't even make sense. Every country is slowly turning into Japan. As more debt is piled on, the interest rates are forced down (bond price goes up) to pay for that debt.

Monetary policy has nothing to do with right or wrong. It's all about perception and belief. Modern people firmly believe a rising cost of living is a good thing. I've had heated arguments where the other person said their cost of living wasn't increasing fast enough. In this kind of political climate, no sane banker or politician would ever want to crash the economy just to defend the value of currency. Both are those actions are considered bad. A smart politician would do the opposite - demand lower interest rates, more debt, and higher inflation. 

Voters generally get what they ask for. People want soaring stock and real estate prices, so that's exactly what they'll get. Rather than get mad about it, I'm invested in real estate. I can't stop people from being stupid, but I can still profit from it. 

LawsofPhysics's picture

Yes, but the math matters.  The population of those that like to see their cost of living increase is shrinking.  The pendulum swings and eventually that which cannot be sustained, won't be.

The world has in fact seen this type of "let the majority eat cake" monetary experiment.

It's all good as long as you can manage to keep the majority from your wealth when the guillotines roll.

Steeley's picture

If the Fed won't raise rates, they lower theirs.. same difference.

It's a race to the bottom, and we're rounding the first turn.

LawsofPhysics's picture

Why, rates are going NEGATIVE!!!!!

What a bunch of stupid fucks.

TuPhat's picture

How is selling a bond at a loss, a reach for yield? I'm not an economist but I understand most your articles ZH but, If I bought a bond at a negative rate of return didn't I already lose the capital. Why does the capital loss not happen until I want to buy another bond at a higher interest rate? I'm confused by the facts but I do know it will all collapse. Fiat, bonds, stocks and any other ponzi cannot last.

Steeley's picture

You didn't loose it as fast as you would've in some other blender. That's the allure.

One-Eyed-Thong's picture
One-Eyed-Thong (not verified) Aug 2, 2016 5:51 PM

"investment grade" ?

you mean like, AAA+ rated Mortgage Backed Securities sold to pension funds ??

GhostofBastiat's picture of those "Bespoke Debt Tranche" remember, they used to be called CDO's back before they re-jiggered the market so it can never fail again /s


lucky and good's picture

Never before do I remember seeing so many predictions of interest rates remaining low forever and a day. Currently it appears the whole world is trapped in an easy money low interest rate environment with no way out. There are signs a massive problem is developing and it holds huge economic ramifications and major risk. Many of us think the bond market is a bubble and when it pops it is guaranteed  to leave a massive path of destruction in its wake.

The idea that markets are always efficient is a myth manufactured by so-called experts such as Paul Krugman in the ivory towers of academia. This is why many of us are wary and have a problem lending hard earned money out for a long period of time. Rates are based on predictions of future government deficits and events around the world that may or may not unfold as expected. Below is an article delving into why bonds, both corporate and government may result in your financial demise.

khaproperty's picture

That´s the reason why central banks buy bonds in bulk. Taxpayer will pay all - as it was in all times of financial repression. And some nations, banks and shadow banks will get happy.