Transcription
The government bond market is in a danger zone. This is not something the speaker is saying casually or making up to sound cool. This is what analysts from HSBC said after seeing the yield on 30-year US Treasury bonds reach a high of 5.2%. Bond yields for many countries, especially long-term bonds, have risen very, very high. They are called a danger zone because it's a zone that can cause other parts of the financial sector to collapse. The question is, how will the Fed solve this problem? If they raise interest rates further, the stock market will collapse. But if they lower interest rates further, the bond market will collapse. So, what should they do? Should they increase revenue, perhaps by increasing taxes? Or should they cut spending and welfare? This might lead to losing elections. Or, in the end, they might not want to ask anyone and just print more money. The problem that is currently occurring is that government bond yields are high, and people say the market will collapse. This is caused by inflation. However, the government's solution is to make inflation even worse. Coupled with the closure of the Strait of Hormuz for a long time, oil prices will continue to rise. This will cause inflation to worsen even more. In this clip, we will explain why this problem arises because the government is acting this way, and the government continues to repeat the same actions, creating a vicious cycle.
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Let's start this clip with when the US government auctioned 30-year Treasury bonds worth $25 billion. They opened it for just one week. The yield, or interest rate, or return on 30-year US Treasury bonds rose to a high of 5.2% on May 19th. This 5.2% yield on 30-year Treasury bonds is the highest since 2007. And what was 2007? It was the end of the cliff before falling into the subprime mortgage crisis of 2008. And this point, at 5.2%, is what HSBC analysts called a "Danger Zone" because it's a point where borrowing costs become too expensive, so expensive that it can cause other parts of the financial industry to collapse. And this danger zone in government bonds is not just in the US; it's also in the long-term borrowing costs of many other countries, such as Canada, France, Spain, Portugal, and the Netherlands. The yield on 30-year German government bonds rose to a high of 3.5%. If you say, "Oh, 3.5% or 5% is still low, Germany's is much lower than America's," but for 30-year German government bonds, this is considered high. It makes borrowing costs in Germany too expensive for them to bear. As a result, the German government forecasts that GDP will grow by less than 1% this year, only 0.5%. Therefore, this 3.5% yield is high for Germany because it means the interest rate the government has to pay is 7 times the economic growth rate in Germany. In the UK, 30-year government bonds also have a high yield of 5.6%. This is the highest since 1998. And Japan, this is the scariest. Japan, which has been trying to make the country have a little inflation for a long time, has tried for 30 years without success. Until recently, they succeeded, causing the yield on 20-year Japanese bonds to spike sharply, rising to 3.5%. This is unusual for Japan, as it used to be around 0.something. Besides the major countries I've mentioned, actually, emerging markets are now selling US Treasury bonds at the highest rate since 2023. Why is this happening? Because everyone desperately needs US dollars to buy oil. Because the war that happened in America, it caused Hormuz to be closed for 3 months. The oil crisis has arrived, and everyone is short of oil. Therefore, what is needed now is dollars to buy oil. Why? Because America has contracts to buy oil with dollars. So, today, everyone urgently needs dollars. What's the solution? Sell US assets. The easiest assets to sell are US Treasury bonds. And the more they sell, the fewer buyers there are. When the number of buyers decreases, and the supply remains the same, the price falls, and the yield rises. And the problem that if oil gets more expensive, US Treasury bond yields will get even higher, there's a tendency for them to rise even further. This is because a senior vice president of Mobil stated at a conference in New York that oil reserves will drop to critical levels within the next 2-3 weeks. By the time this is broadcast, it might be only 1-2 weeks left. And at that point, oil prices will skyrocket. They estimate the price on paper to be around $160 per barrel. If this really happens, the need for dollars will definitely increase. And what does that mean? The yield on US bonds will also have to increase.
And why is the bond market important? To put it simply, to see the importance, let's see the size of the bond market. If we consider asset markets, excluding real estate, the largest asset market in the world is the bond market. According to Sifma Capital Markets, the global bond market is worth $145.1 trillion. It's larger than the global stock market, which is worth $126.7 trillion. This means if the bond market truly collapses, it could be more frightening than the stock market collapsing. Let's think simply, not saying it will happen. Let's think. If the bond market is worth $145 trillion, and if bond prices worldwide fall by an average of 10%, it means the market value has decreased by $14.5 trillion, which is equivalent to half the value of the gold market disappearing. Just like that. So, if you ask, "Hey, can the bond market collapse? What would it look like, like the stock market collapsing?" First, it can collapse. All asset markets can collapse. The bond market can collapse too. If defaults occur, if debts are defaulted on, it will collapse. But when the bond market collapses, it won't be exactly like the stock market collapsing. In the stock market collapse, we might see stocks fall because many companies go bankrupt. But the form of a bond market collapse is that bond prices fall sharply, and yields rise very, very high, like what happened with government bonds as mentioned earlier. But it's not yet said that the government bond market has collapsed. And yes, in this clip, we need to talk about what high yields mean. So, if you ask, "Has the bond market ever collapsed?" Honestly, if you say it collapsed completely, it might not be that extreme. But if you call it a crash, then yes, like in 1994 with the event called "The Great Bond Massacre," or as I've named it in Thai, "The 1994 Bond Market Massacre." Look at the name. This is the event that old bond investors fear the most. Because back then, in 1994, communication wasn't as fast as today. No one could follow the Fed's news instantly. And suddenly, the Fed raised interest rates faster than the market expected. Around the beginning of the year, the policy interest rate was 6.4%. By the end of the year, it was 8.1% within 12 months. This was very fast for that era. And when yields rise, bond prices fall. And at that time, it caused global bonds to be sold off, with a market value loss of $1.5 trillion. This amount of money is enormous in 1994. Or in the modern era, it was in 2022, the worst in modern history, after inflation surged, and former Fed Chairman Jerome Powell raised the policy interest rate from zero to 4% very quickly. I remember watching the Bitcoin chart that day. It was red like water. This caused the price of 20-year US Treasury bonds to fall by 30%. The New York Fed stated that this event was the largest sell-off of government bonds in four decades. Many media outlets named this event "the worst bond bear market in history." And the strange thing is that normally, the bond market and the stock market tend to move in opposite directions. If one falls, the other rises. But the special thing about that year was that the bond market collapsed, and the stock market also fell. So, there were news reports at the time saying that the popular asset allocation strategy of 60% bonds and 40% stocks, whoever held this formula, everything collapsed.
After hearing all this, some people might ask, "Then why don't you just call it a bond market collapse and be done with it? Why do you have to say it's a severe downturn?" It's hard to say, and this difficulty in saying it needs further explanation. If you say the bond market has collapsed, it should mean there's no money to pay. But so far, we've seen media outlets constantly talking about the bond market collapsing, but it mostly doesn't collapse. It's more like the bond market is ready to flip upside down and surprise the forecasters at any time. This is because this market has a certain ambiguity. I believe that actually, no matter how high the yield or interest rate gets, what creditors fear most is not whether they will get their money back or not. What creditors fear most is how much value that money will have when they get it back. It's about inflation. It's the same issue. Imagine you lend money to someone, and that person can print money. And when you lent them the money, they kept printing money. You lent them money and said, "Okay, you'll return it in 30 years." For 30 years, they kept printing money. And every time they printed, the value of the money depreciated. That's inflation. Of course, if you are a creditor and you see the debtor doing that all the time, you'll be angry. Because that's how money is printed, causing inflation, and inflation reduces the value of debt. Therefore, creditors, or those who buy bonds, do not like inflation. But trade conflicts, the collapse of globalization, the war in Iran, the closure of the Strait of Hormuz, a 20% drop in oil supply, supply chain disruptions, leading to energy crises, fertilizer crises, food crises, and also the issue of a rapidly aging population that governments cannot handle. All of this points in one direction: Yes, inflation. So, remember this: the higher the inflation, the more creditors dislike it. And if creditors dislike it, bond yields will rise even higher. And will long-term government bonds have a chance to rise further? Look at this data. Bank of America found that 62% of fund managers believe that 30-year US Treasury bonds have a chance to rise to 6% by the end of this year.
So, we need to ask further, what will expensive government bond yields lead to? If they become very expensive, they will become higher borrowing costs, right? This can cause companies to collapse, and it can cause the stock market to collapse. And rising bond yields are one of the mechanisms that can cause the stock market to fall. Because first, this is a traditional belief. Even though things have changed today, some people still believe this: government bonds are a safe haven, a risk-free asset. Whether it's safe today or not, I don't know, but some people will believe that government bonds are a safe haven. And if government bond yields rise, money will flow out of risky asset markets, like stocks and crypto, into safe haven assets. It's like if you invest in stocks and you're not sure if you'll get a return of 5% or not, you might lose money, going up and down. Isn't it better to put your money into bonds? You'll definitely get 5%. This is the kind of thinking. And besides this, when bond interest rates become expensive, this interest rate will seep into every part of the economy, becoming higher financial costs. And "everything" means where will it seep into? Home loans will become more expensive, the housing market won't survive, people will have to use their money to pay off more debt instead of using it for living, for spending, for buying things, they won't be able to do that. That's the personal level. But if it's at the corporate level, for listed companies, entrepreneurs, if anyone has borrowed a lot, they will be in serious trouble. And the industry that has borrowed the most among US industries right now is none other than AI. AI has a huge debt right now. Importantly, the entities absorbing AI's debt are not banks, but private credit funds. And private credit is currently in trouble. Let's look at the private credit clip; this section also looks like it's about to collapse because it has absorbed about $2 trillion in debt. Can AI generate profits to repay the debt with interest? No one can answer that. And importantly, when the loans were given, they were called floating rates. Floating rates work well when interest rates are low. But if interest rates are not low, they can rise as much as they want, right? This floating rate is another misfortune for companies that have borrowed a lot, especially those borrowing not from the banking system, but from private credit. And especially if they borrow at a floating rate, it means they can let it flow. Who knows how high the interest rates will go? In summary, for listed companies that have borrowed, their borrowing costs will increase accordingly, following the rise in interest rates.
And for governments, the US government's public debt is currently $39 trillion. How much do you think they have to pay in interest annually? The US government now has to pay a debt burden, including interest, of $1 trillion per year. This is a higher expense than the defense budget. The US defense budget last year was just over $900 billion, but the debt is $1 trillion. And in the book "The Coming Chiến" by Niall Ferguson, he states that any superpower that spends more on debt repayment than its defense budget risks losing its superpower status. The United States has already crossed this line. So, if you ask, is there a way out now? What can the Fed do? The answer is, maybe, but it's quite limited. The fundamental choices the Fed has to manage large economic and financial problems are only two: raise or lower interest rates. But right now, raising or lowering will cause collapse. Let's start with inflation. Inflation is very high right now. Since the war, oil prices have increased by 60%, jet fuel by 58%, gasoline by 52%, European natural gas by 54%, fertilizer by 20%. All of this becomes a cost for the goods we buy, causing the Producer Price Index (PPI) to rise to 6% and the CPI to rise to 3.8%, exceeding the Fed's target of 2%. This means 3.8% is almost double the target for inflation. So, if you ask, "With inflation this high, why doesn't the Fed raise interest rates aggressively to control inflation?" Has there ever been a Fed chairman who took drastic measures to curb inflation? Yes, in the 1970s, the Fed chairman was Paul Volcker. The most aggressive action was to raise the policy interest rate to 20%. In the early 1980s, industries were in decline. Homebuilders were very angry, not knowing what to do, and sent their tools to the Fed. Car dealers couldn't sell cars and sent their car keys to the Fed. Someone even said that at that time, Paul Volcker even took the tools that homebuilders sent to the Fed and put them in a museum. And some joked that it's probably not a good place to be now because Jerome Powell might use those tools to expand the Fed when it's under attack. But was what Paul Volcker did at that time, raising interest rates to curb inflation, good? Yes, it was good because it was followed by a long period of low interest rates for four decades, and a peaceful bond market for 40 years. But why could he do it then? Why could Paul Volcker do it? Because back then, let's look at US government debt. It was only 30% of GDP. So, even if interest rates rose by another 20%, the government could still afford to pay its debt. But today, US government debt, which is $39 trillion, is nowhere near 30% of GDP. It has risen to 120% of GDP. Just the interest alone is $1 trillion per year. If interest rates are raised further, we simply cannot afford it.
So, how about this? Let's lower interest rates. Let the economy run hot, hot, hot. Let AI boom, let it boom. Can that be done? No, because if interest rates are lowered, the bond market will truly collapse. Why? Because inflation will become extremely high. High inflation, creditors dislike it. Creditors dislike it, which will cause yields to rise very high, bond prices to fall, people will sell bonds. And finally, if government bond yields rise very, very high, it will again become borrowing costs. And importantly, do you know what? It's possible that even if interest rates are lowered to the absolute minimum, it might not be as effective as before. Will it be effective? It must be effective, but will it be as effective as before? It might not be, because there is so much debt now. Lowering interest rates is intended to reduce borrowing costs so that people borrow more to expand the economy. The problem is that there is already a lot of debt, and people with debt cannot borrow more. And what about banks? Will banks be willing to lend easily, even if interest rates are at their absolute lowest? Look at Thailand. Even though the policy interest rate is 1%, is it easy to borrow? No, it's not easy. So, if you ask, "Will yields rise even higher?" Why? The answer is yes. It seems likely. Because, as I said, people are selling off in droves. Small and medium-sized investors are selling, which is one thing. But major players like China and Japan are the largest creditors of the United States. China once held a maximum of $1.3 trillion in US Treasury bonds, but China has been selling continuously for 17 years, so now China holds only $650 billion in US Treasury bonds. As for Japan, they might not be selling US bonds because they don't like America. But Japan has to sell US Treasury bonds to maintain the value of the yen. And importantly, Japan is a country that imports 90% of its energy. But now, with the energy crisis, America is waging war and closing Hormuz, there's no oil, so there's an energy crisis. So, with the energy crisis, as mentioned earlier, they will have to use money to buy oil. And where will they get the money to buy oil? US dollars. Because America has stipulated that oil must be bought with US dollars. So, what is the easiest way for Japan to get US dollars? Sell US Treasury bonds. And yes, other countries are in the same situation as Japan, having to sell a lot of US Treasury bonds. Saudi Arabia, India, UAE, Norway, Singapore, all the same. And every time someone sells US Treasury bonds, it means demand for bonds decreases, which means America will have to pay higher yields to find new customers to replace them.
So, if you ask, "Well, if they can't find new customers, who will they sell to?" The answer is, they will sell to Americans themselves. How? Not directly to individuals. They will sell through pension funds, passive funds, etc. I will make a clip about the largest IPOs in history: the three IPOs of SpaceX, OpenAI, and the IPO that is very hot. Because on May 1st, Nasdaq changed its rules to make these pension funds, passive income funds, etc., the buyers of these three companies. I'll keep it a secret for now. Click subscribe, I'm writing it now. It will be out in a few days. But let's get back to the bond market. What if, in the end, all these funds that are supposed to buy are still not enough for the demand to borrow? What then? In the end, the Fed will have to print money to buy its own debt. Yes, they can do that. Let's look at the US debt again. US public debt is $39 trillion. This increases by about $2.5 trillion per year. Look at the government's revenue. US government tax revenue is about $5.23 trillion per year. Expenses, such as Medicare, welfare, etc., are about $7 trillion per year. And the debt to be paid annually is $1 trillion. This is much more. This means the US government spends more than it earns and has been spending more than it earns for a very, very long time. And mathematically, expenses can never match revenue, and they will only continue to increase. And in the end, it can only end in one way: the Fed must print money to cover what cannot be paid. And what does that mean? I'll repeat: it means inflation. Creditors dislike inflation, and it will cause yields to rise. When yields rise, bond prices fall, and people will rush to sell. And this will cause yields to rise even further. But some people say this will not be a collapse. They want to call it a repricing at a high price. And what can we do? Prepare to hold assets that are not subject to inflation, because government money will surely inflate.