What did the Bank of England mean by this? Part 1
Have you noticed how the stock market pumped at the beginning of October? Other risk-on assets, such as crypto, pumped together with it — and there’s a good explanation.
Central banks around the world are now very much into stringent monetary policies. They are raising interest rates and taking excess liquidity out of the system.
We’ve all seen the consequences for stocks and cryptocurrencies — but few have been watching the bonds market. In the past month, it has collapsed, with investors selling off both national and corporate bonds. Keep in mind that the bond market is the largest in the world, worth dozens of trillions of dollars.
The problem is that when bond prices drop, their yields increase. When the yield is between 0 and 1%, as it was for the past 10 years, governments can keep printing money without any worries. But once the yield approaches 5%, as it has recently, states begin to worry about making interest payments. Many leading economies’ debt is larger than their GDP, and their bond yield payments are disastrously large.
It’s not surprising, then, that investors are selling off bonds. They are asking themselves: will there still be demand for trillions of dollars’ worth of bonds in the future, if central banks don’t do anything? Can it happen that countries like Greece will default on its debt — followed by Italy or even France?
In addition, there is talk about a possible bankruptcy of some large German and French banks. The real estate market in many countries is also close to panic: home buyers simply can’t keep paying their mortgages. It’s starting to look more and more like 2008.
But for now, we can relax and take a deep breath: it seems like a solution has been found. It should at least stop the stock market from dumping any further. The same applies to the crypto market. What is this solution? Tune in for Part 2 of this article.
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