Paradigm Shift: The Return of Volatility

Holy Moses, hold on to your hats folks! We are in for a wild ride!

Interest rates led by US treasuries around the globe are sky rocketing higher. The implications attached to this meteoric move will be incredibly difficult to grasp.

The sheer amount of debt attached to these rising yields has never been higher. The same goes for the momentum that chased these ultra low yields and other bond proxies such as REITs and Utilities.

Of course there’s one place on earth where interest rates can’t lift off. Because the BOJ in all of its wisdom decided to put an artificial ceiling on their yield curve. Well there is a cost to this yield curve control and that is the monetization of every bond that gets sold to them, which is why it is so important to watch the Japanese government bond yield curve. Once rates start pressing up against the BOJ’s targets, it will be forced to intervene.

While US and other developed nations bond yields are rising, Japan’s will be pinned to the floor and the BOJ will prints trillions and trillions of Yen to maintain said peg. If this continues the Yen will weaken considerably as the Japanese seek a better rate of return outside the country.


The weakening of the Yen is not without its consequences of course. The BOJ has given up control of its balance sheet to the markets in return for the control over the price of its bond market. Helicopter money has never ended well through out history, and yet if the Japanese are sending billions of dollars out in the world, asset prices could be supported.

With that said, there is an underbelly to rising US interest rates, which is a much stronger dollar. China’s struggles with the currency peg have been well documented. Rising rates in the US will tighten liquidity in China’s fragile economy increasing the risk of a crisis. China’s crisis has remained elusive to the bears for over a decade, and perhaps it is further out than I or most bears seem to think, BUT…

Just like emerging market bulls were blind sided by the US subprime crisis in 2008, I fear equity bulls are making a similar mistake ignoring the rising China risk.

One thought on “Paradigm Shift: The Return of Volatility

  1. Pingback: The Case For Higher Interest Rates: Setting The Stage For The Next Global Crisis – The Klendathu Capitalist

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