Trillions of dollars of investor funds are under threat from soaring global bond yields, and the Swiss-based Bank for International Settlements (BIS) has warned that we are on the cusp of another fresh financial crisis unless banks are braced for the monetary shock.
BIS stated that losses on U.S. Treasury securities alone will reach in excess of $1.00 Trillion if the average yield increased by 300 basis points, with the potential for even greater damage in other nations – Japan, Italy, the United Kingdom, and France would see losses from 15% to 35% of their respective GDPs.According to the BIS in its annual report, “[s]uch a big upward move can happen relatively fast,” referencing the 1994 bond crash. “Someone must ultimately hold the interest rate risk. As foreign and domestic banks would be among those experiencing the losses, interest rate increases pose risks to the stability of the financial system if not executed with great care.”
This comes after the U.S. Federal Reserve catalyzed one of the most dramatic surges in borrowing costs for a decade just last week, with mention of an early exit from the Quantitative Easing (QE) strategy that has been shoring up the economy. The yield on 10-year Treasuries spiked 80 basis since the Fed began pointing to withdrawing QE.
This has threatened to once again bare the flaws in Europe and the cracks in the financial structure of the Eurozone.
The BIS appealed for a combination of monetary and fiscal tightening, which has prompted warnings from economists around the world that the global economy may be pushed once again into a recession.
In my opinion, QE is not suitable as a long-term strategy to engender strength in the domestic or global economy. The problem is that by creating an environment of extreme liquidationism resulting from the influx of central bank funds into commercial coffers, we are susceptible to a culture of aggressive risk-taking, and financial inequity resulting from poor distribution of capital. Even Bank of Canada Deputy Governor Timothy Lane warned last week that there is concern regarding the misallocation of funds, specifically with mortgages being funded by debt rather than deposits, moving lending away from the more traditional “on-balance sheet” model. Extended QE has provided governments and financial institutions with an artificial buffer to enact real economic repair and reform, but this has in many instances been squandered. We are all now victim to whether or not the central banks and their respective governments are able to strategize the proper balance of monetary and fiscal tightening, without ruining the progress of what the so-called “ultra-stimulus” culture has benefitted. The next 12- to 18-months will be telling, and it may be a wild ride for us on the ground in the financial and real estate markets.
Regardless, if you’re thinking about making a switch, purchasing a home, or refinancing your mortgage, contact your REALTOR® & Mortgage Broker, or feel free to give us a shout, and We’ll be happy to chat.
REALTOR® and Senior Private Loan Specialist - Residential & Commercial
Century 21 Desert Hills Realty and EQ Lending Corp.
Broker/Owner of EQ Lending Corp.