Happy Sunday morning everyone! 
The bond markets and interest rates are sending a very strong signal: we are getting closer to something major breaking in the global financial system.
Interest rates at critical levels
Interest rates continue to climb ever higher:
Higher rates deteriorate the value of collateralized bonds risking a collateral and USD shortage, a repeat of 2008.
US govt bonds
The US treasuries market, the global reserve asset and bedrock of the global financial system, should be making G7/G20 officials very nervous.
Unfortunately for them, none of them can take any preemptive QE/ debt monetizing efforts without destroying their “economy is strong” / “soft landing” rhetoric and their credibility along with it. They know the situation, are in desperate need of inflation/currency devaluation as well as political cover (like a bank or economic crisis) to start QE / debt monetization / deleveraging.
US Banks and Financial Sector
This has hit not only US banks but also the broader financial sector:
Junk Bonds
US junk bonds continue to deteriorate:
While European, UK and Canadian junk bonds are imploding:
Muni Bonds
Muni bonds made their lowest weekly close since Nov’23 breaking a pivotal level:
US Mega Caps
The Mega Caps have finally started to react to the increasing risks and are showing signs of rolling over into Intermediate term declines which risk cascading into even larger yearly cycle declines, i.e. multi-year bear markets.
S&P500 and Nasdaq100
This can also be seen in the US indices as well. When the drop comes, the foreign capital unwind (see explanation in earlier thread updates) will not be orderly i.e. crash like downside volatility.
Secular Shift
My thesis for a long while now is that the global economy was in a debt trap headed for an inevitable deleveraging and stagflation. In my mind, the real question was when the rest of the markets would reach a similar conclusion.
With the risk off reaction to last Friday’s NFP beat (sign of a strong economy) I believe that markets have now realized this as well. Any positive economic data or hawkish Fed /CB jawboning means:
- less chance of monetary easing
- leading to higher rates
- leading to further bond market turmoil
- leading to higher bank balance sheet risk
- leading to higher USD demand (to cover collateral shortfalls) and decline in equities
- leading to lower business growth and tax receipts
- leading to higher deficits and bond issuance
- leading to higher rates….wash, rinse, repeat.
The big players have already understood this as this big picture gold vs S&P500 chart shows the ongoing secular shift out of risk assets:
And commodities are close to breaking out into a second leg higher:
I’ll be watching the Monday open in Japan and India as both of these bubble markets were closed and have yet to digest the NFP risk off reaction.
Either way, should be a very eventful week.