Official Warnings of a Bond Markets Crash in U.S. and Europe

The effects of long-term, hyperinflationary “quantitative easing” policies by the major trans-Atlantic and Japanese central banks have led, in recent days, to even “official” warnings of a coming financial markets crash. Particularly in the bond markets — much larger than the stock markets — the seven-years-long attempts to buy and bury toxic debt with new, zero-interest debt has produced widespread public nervousness about a crash.

A March 18 Bank for International Settlements (BIS) report “Warns About Oil Sector’s High Debt, Low Prices,” says a Reuters headline.

“A toxic mix of high levels of debt in the oil sector and the sharp decline in the price of the commodity could have far-reaching effects on the global economy,”

economists at the Bank for International Settlements warn. The new BIS report shows that the total debt of the oil and gas sector worldwide stands at roughly $2.5 trillion, two and a half times what it was less than a decade ago, at the end of 2006. Because of “a significant decline in the value of assets backing the debt in this sector,” the leverage of most of this debt has gone above 30:1, and a sell-off of it is underway. “The sell-off of oil company debt could spill over to corporate bond markets more broadly if investors try to reduce the riskiness of their portfolios. The fact that debt of oil and gas firms represents a substantial portion of future redemptions underlines the potential system-wide relevance of developments in the sector,” the BIS economists wrote.

On March 19 the Office of Financial Research, part of the Treasury which now does research for the Financial Stability Oversight Board, issued a report saying that U.S. financial markets may be on the verge of a crash. They based the warning on extreme levels of leverage in the debt markets, only characteristic of pre-crash conditions in 1929, 2000, and 2007.

Proliferating warnings in the financial media about “a crisis of liquidity in the bond markets” are paradoxically being made, just as the central banks print and pump unprecedented volumes of liquidity into these markets. The problem is that — just like in 2005-07 when banks and funds all piled into the same types of MBS and CDOs — all of the liquidity is buying a few categories of (mainly a half-dozen countries’ government) bonds, pumping up huge bubbles in these bonds and using them en masse on the repo markets. Other kinds of bonds are becoming illiquid, and oil and gas debt and derivatives provide the perfect example.