Leading up to Greece’s deadline to pay the IMF, Monday stock markets all over the world fell, and the turmoil sent interest rates sharply lower as money fled to the safety of bonds – quality bonds that is.
Specifically, U.S. Treasury bond yields took a nosedive. But the German bund led the way as its yields fell by nearly 25%. The 10-year bund fell from just under 1% to 0.74% overnight!
While those rose, yields on lower quality Euro debt – Italy, Portugal, Spain and of course Greece – moved higher. Just as investors moved to safer bonds, they fled these bonds because they fear that if Greece defaults, others may follow.
Then we have a similar problem to Greece’s here at home: Puerto Rico has $72 billion in debt, and its governor just announced that they cannot pay it.
Under current rules, the U.S. territory isn’t allowed to file bankruptcy. Still, the governor may seek permission from Congress to do just that. Otherwise, they’re stuck negotiating with creditors… and we see how well that’s working in Greece.
This leaves a number of questions in the air: Where will these insolvent nations and territories turn for help? Will creditors continue to lend or will they get scalped? Will these events trigger more dominoes to fall?
The Fed and central banks around the globe are trying to prevent a spillover effect by encouraging more government debt with artificially sustained low rates. To let governments deleverage their debt would shatter whatever illusion is left of a stable global economy.
We’re in a situation where unsustainable promises made by politicians, and policies by central banks, have resulted in unpayable debts. And they can stop governments from deleveraging or defaulting all they want. But pretty soon we’ll learn that there is no bankruptcy protection afforded by law – only reality, the end of the line.
Harry and Rodney have been writing about these topics for years. Debt bubbles are nothing new, and we could be witnessing the first of many to pop. As Harry has said many times, debt deleveraging needs to happen before any real recovery can occur.
Fortunately for Dent Digest Traders, volatility will remain high as the markets stand dazed and confused for some time. There will be plenty of opportunities to profit from the madness.
Editor, Dent Digest Trader