Economist Desmond Lachman thinks the US is facing a bond market crisis; he thinks several other leading economies are as well.
The former International Monetary Fund director now serves as a senior fellow at the American Enterprise Institute, an economic policy think tank. He recently addressed the bond market crisis he sees brewing in a blog post, noting that $8.5 trillion of outstanding US Treasury bonds are currently held by foreign investors.
“This would seem to set the country up for a government bond market crisis should foreigners come to believe that the US was on the way to inflate its way out of its debt problem or that the US could further weaponize financial policy,” Lachman said.
Last week, the yield on the 30-year US Treasury bond rose above 5% for the first time in nearly a year, driven by inflation and rate hike concerns.
More recently, JPMorgan Private Bank warned investors that if inflation remains sticky, it may pose complications for both stock and bond markets. A report from the bank drew parallels to the inflation crisis of the 1970s, which led to a bear market for bonds.
But as Lachman noted, the brewing bond market crisis isn’t confined to the US.
“Three of Europe’s four largest economies are drowning in debt,” he said. “While in 2010 the Eurozone debt crisis was centered on Portugal, Ireland, Italy, Greece, and Spain, Today it is France, Italy, and the United Kingdom about which we need to be worried.”
The economist added that all three European nations have a public debt to GDP ratio that exceeds 100%, and each one is running a budget deficit of at least 5%.
Lachman noted that it could be thrown into recession by the series of ongoing shocks in energy and food markets. That said, he sees similar problems developing in one of Asia’s top economies.
“With a public debt to GDP ratio of around 230 percent and an expected primary budget deficit, Japan appears to be well on the way to a bond market crisis.”
In Lachman’s view, the rise in the 10-year Japanese government bond yield from 0.75% to 2.5%, its highest point in twenty years, is highly concerning. He also cited Japan’s high vulnerability to the oil shocks of the Iran war as another pain point.
He believes corrective measures are necessary in the US, Europe, and Japan as soon as possible to prevent a global bond market crisis from unfolding.
“The urgency of the need for such action is underlined by the fact that there appears to be government bond market problems brewing in each of these three major economies and that could have contagion effects should a bond market crisis occur in any of these economies,” Lachman stated.