There was some follow through on Asia’s bourses. But in a sign of the nervousness, European stock markets stalled again and Wall St futures were back in the red. The dollar found its feet after it was knocked back yesterday too.
The problem for bond markets is that the short-term economic and interest rate picture is just one part of the problem – and longer-term unknowables about the parlous state of U.S. government finances, congressional dysfunction and fiscal policy stasis is starting to unnerve long-term bond buyers.
The unprecedented ouster of House speaker Kevin McCarthy by his own party this week opens up a fractious search for his replacement and likely makes agreement on next year’s spending bill even more difficult to reach before the latest deadline for a government shutdown is hit on Nov 17.
And the whole mess just compounds concerns about fiscal policy going into an election year and at a time when deficits and debt servicing costs are soaring.
Reflecting some of that, the New York Fed’s estimate of the so-called term premium on 10-year debt – the added compensation investors seek for holding long-term bonds to maturity over short-term notes – has turned positive for the first time in two years this month and hit its highest since 2015 on Wednesday.
And as the ‘risk free’ cost of government borrowing surges, investors are increasingly wary of disturbance in banking, mortgage and credit markets around the world – markets that are forced to price off rising sovereign yields.
Although a small player in UK banking, shares in Britain’s Metro Bank which have lost more than 50% in a month – plunged again on Thursday following reports the lender was exploring options to raise as much 600 million pounds ($728 million) in debt and equity to bolster its finances.
Metro Bank has had long-standing issues with regulators over its internal risk models – but its scramble to raise capital will remind many of the U.S. regional bank woes in March and others of the rumbling in mortgage markets 15 years ago.
