Bond markets around the world are crashing, just as they did in the run-up to the 1987 crash. Debts have skyrocketed. The stock markets are overloaded, and in many cases company values have risen to the point of crashing. A seemingly indestructible bull market is coming to an end. It’s not hard to imagine that this could lead to a storm of destruction blowing across the markets.
If that were to happen, a market crash on the scale of 1987 would be a catastrophic political and economic event. This would send interest rates soaring and increase costs for mortgage holders and heavily indebted companies, particularly in the real estate sector. Businesses would fail and pension funds would be in trouble.
Perhaps most importantly, the already high costs of servicing the national debt would rise even further. It would force wasteful politicians to finally face the consequences of their wasteful spending.
There are many things in the financial markets in recent weeks that are very similar to the late 1980s. However, there is an important difference. Policymakers still had fiscal space to respond to the Black Monday crash. After two decades of easy money and constantly cushioning markets with quantitative easing to prevent a crash, that no longer exists.
It remains to be seen whether we will witness a repeat of 1987. But one thing is certain: if we do, it will be much worse this time.
Lightning attack on the bond market
Investors are starting to worry about a repeat of Black Monday, particularly because of a sell-off in the bond market, where companies and governments issue debt promising guaranteed returns. Typically a sleepy corner of financial markets, the bond market has been hit by a wave of selling in recent weeks.
If you want to clearly illustrate the decline in the bond markets, Vienna is the right place. At the height of the sovereign debt bull market, Austria cleverly issued a 100-year bond and then reissued it in 2020. With a coupon of just 0.85 percent, investors would have to wait a century before they got their money back. And despite all the risk and patience, they would earn less than 1 percent return.
Astonishingly, the issue was subsequently oversubscribed 16 times, as investors fought to give away their money for virtually nothing until long after her death. And today? The value of the bond has, perhaps not surprisingly, fallen sharply. If you sell it, you will only get 33 euros back for every 100 euros invested.
Why someone would want to loan the Austrian state money for 100 years is perhaps a question that only psychologists can answer. What is certain is that the bond market has lost value at a spectacular rate in recent months. The Austrian 100-year bond is an extreme example, but the value of most major bonds has fallen 40 to 50 percent over the past year, with losses accelerating over the last month.
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