Yep Helicopter Ben is just happily printing $85 billion every month...so Congress does not have to raise the taxes or cut the government expenditure. Hence the stockmarket rallies and everyone in the financial markets feels happy despite negative GDP of -0.1% and unemployment of 7.8% and of course massive fiscal deficits of 7% of GDP. Meanwhile 10 year bond yield is marginally over 2% not enough to cover you for inflation despite spiralling fiscal deficits and national debt to GDP ratios. Well something is going to prick the bond bubble at some point (i) the Bond Vigilantes decide enough is enough and start realising that the new Masters of the Universe that is the Central Bankers are like emperors with no clothes (ii) inflation starts to pick up and the Central Banks have to get it under control and so are forced to raise interest rates and everyone realises they have too many bonds in their portfolios or (iii) Some minor event that does not seem that significant at the time comes along and one or two weeks later becomes seen as the butterfly that flapped its wings causing a tsunami in the bond market. My bet would be on (iii) ! How much could US bond yields rise to? I know this sounds outlandish but 7% would not be unreasonable within say 2 years or less, that means bond holders with 10 and 20 year bonds could suffer a wipe out ! I know a preposterous prediction but there you go. Nice link to Yahoo article with Federal Reserve Governor Jeremy Stein making the point about banks vulnerability to a rise in bond yields link.
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