Bond market crash for the record books

Still, the UK government appears determined to fix this with its latest debt-fueled tax package, which has sent the pound to its lowest level since 1985.

And the Bank of Japan – which remains committed to ultra-low interest rates – has been forced to intervene in foreign exchange markets to prop up the yen’s value for the first time in 24 years and try to stem the currency’s ongoing slide against the US dollar .

Investors sold off bonds as the US Federal Reserve continues to raise official interest rates to tame inflation, which is stuck near a four-decade high. (Yields rise when bond prices fall).

As a result, the Fed has hiked interest rates by a total of 3 percentage points so far this year, the fastest monetary tightening since the early 1980s.

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This has prompted top economist David Rosenberg to make an even grimmer comparison with the stock market collapse in October.

“We could be heading for an October 1987 crash led by an aggressive Fed and rising bond yields,” he tweeted.

“The difference is that commodities were in a bull market at the time, the dollar was stable and real GDP growth was +5% yoy. So this financial tightening could be worse and there is no economic support.”

As bond yields serve as a benchmark for evaluating other financial assets, the vicious sell-off in bond markets is dragging global equity markets lower, with the US-S&P 500 is now 23 percent below its January peak.

So far, however, investors have lowered price-to-earnings multiples in response to rising interest rates. The real market carnage will come as investors focus on lower earnings.

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Eat in profits

For example, Goldman Sachs strategist David Kostin set his year-end target for the S&P 500 from 4300 to 3600 because he believes higher interest rates justify a 15x P/E of S’s say $234&P earnings per share in 2023.

The risk is that sharply higher interest rates will hurt sales and hurt corporate profits. If that were to happen, and if 2023 S&P earnings per share would fall to say $200, then the US stock market would take another pull down.

Indeed, the combination of a P/E of around 15 with a $200 earnings forecast suggests that the S&The P 500 goal should be around 3000. That would suggest the US stock market is down another 18.8 percent from last week’s close.

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In other words, a brutal 37.5 percent plunge from the January peak.

Hartnett warns that while the losses from the great bond bear market of 2022 will rival the three worst bond market falls in the last two centuries, the pain isn’t over yet.

“The bond crash of the last few weeks means credit spreads have hit highs, stocks haven’t bottomed yet,” he says.

He warns that the Fed’s target interest rate, US long-term bond yields and the US unemployment rate will all rise in the 4 to 5 percent range in the coming months.

Investors, he says, are demanding policy coordination and credibility from governments and central banks, and “until they get that, they’re likely to push shorts.”

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