This past week saw global sovereign debt markets absolutely dump. Here’s how it might get a lot worse.
Bond Yields Soar
Friday saw global sovereign debt markets in free fall. Yields spiked across the board- not because of some sudden inflation panic, but because of a much deeper, more structural force at work.
The trigger?
The Strait of Hormuz is effectively shut down.That narrow waterway carries about 20% of the global oil supply(and a third of global seaborne oil). With it throttled, oil prices have shot higher, slamming net oil importers in EU, Asia, and the UK with a brutal terms-of-trade shock.
For countries like the UK and France, their trade deficit is the primary driver of their current account deficits, and are therefore widening rapidly, as energy import bills balloon.
To finance those bigger deficits, these countries have two choices: sell foreign exchange reserves (i.e. dump U.S. Treasuries) or borrow even more. Both paths put immediate upward pressure on bond yields.
If they dump US Treasuries, that’s selling pressure that leads to lower bond prices (i.e. higher rates), and if they choose to issue debt, that debt must then compete in the global bond market with a rate that is satisfactory to attract demand.
The End of the Backstop
At the same time, the Gulf oil exporters, the same players who normally recycle petrodollars back into …
