The continuing sell-off in the world’s most important market is steadily increasing the risk that something within the financial system will crack.
The continuing sell-off in the US bond market, where yields are hitting levels not seen since 2007, is steadily increasing the risk that something within the financial system will break.
The spot price of the index traded above its three-months futures equivalent, suggesting to some analysts that “peak fear” has now been priced in. That’s something, however, that will only become evident with hindsight.The US dollar continued its surge against the currencies of America’s major trading partners, with speculation that the Bank of Japan will intervene to halt a sell-off of the yen and the Australian dollar falling below 63 US cents overnight.
There is already considerable stress within the US commercial real estate markets, with higher interest costs overlaying the impacts from the pandemic and the significant levels of vacancy caused by the shift to working from home. Commercial property is particularly sensitive to material movements in interest rates.
The markets are being driven by the bond market, where investors have bought heavily into the Federal Reserve Board’s narrative that US interest rates will remain higher for longer than either the board or investors thought probable earlier this year. Hedge fund and other shadow banking activity isn’t transparent but has increased dramatically as a result of the more onerous regulation imposed on banks after the 2008 financial crisis. Macquarie has estimated that commercial banks now originate less than 40 per cent of credit.
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