Massive Bubble in Government Securities Threatens Global Financial Stability

As the FED begins to taper off from its massive monthly purchases of $85 billion worth of securities, it is likely to trigger a rise in interest rates. In turn, this could lead to panic selling of interest-bearing assets as investors try to avoid capital losses due to the inverse relationship between bond prices & yields (i.e., interest rates).

“If I were to single out what for me would be biggest risk to global financial stability right now it would be a disorderly reversion in the yields of government bonds globally.”

“Let’s be clear. We’ve intentionally blown the biggest government bond bubble in history.”

“We need to be vigilant to the consequences of that bubble deflating more quickly than [we] might otherwise have wanted.”

~Andy Haldane~ (director of financial stability for the Bank of England)

According to BIS, there are financial derivative worth $441 trillion betting on interest rates (Table 4).

Read that again, $441 TRILLION!

If interest rates rise even a few percentage points, to say 3%, the specter of catastrophic losses could add to panicked selling.

A word to the wise: Beware stampeding bears.