Will debt and bond market soon take center stage?

 JAPAN BOND MARKET MAY BE FIRST TO GO

OTHER WESTERN BONDS MAY BE NEXT

 

While the world is focused on the Iran war and oil prices the next serious crisis may be underway in Japan. Japan has the largest debt to GDP in the world, often linked to their financial crisis from 1989 that has never been resolved, just papered over like many countries in the west. Japan is the largest holder of US debt and problems in Japan will cause a need to liquidate other holdings to salvage their bond market.

 

It may be a cascading problem that will affect all bond markets. The 10 year US treasury is now yielding 4.7 % and 30 year 5.25%. Japan holds over $1 trillion of US debt and it may be necessary to liquidate some of that and not buy any more. China has been downsizing its exposure to US debt for some years and now hold near half of what it did some time ago. With massive deficits in the US, and a desire to dramatically increase defense spending, it can only go one way.

 

This will result in servicing the existing debt to become the biggest single expense in the budget which is already over $1 Trillion. This crowds out money for important investments as the past spending begins to cripple economic growth going forward. It has been reported that Metals have replaced Treasury debt as the largest share of foreign reserves. 

 

This coupled with the gulf countries also experiencing almost no income for now over 5 months have liquidated gold and treasury bonds and also are being covered by the US treasury. The US treasury will not be able to intervene in the gulf countries and Japan and manage its own problems that are escalating.

 

Much of the debt in the US can be attributed to 30+ years of foreign military intervention coupled with buying votes with more grants and spending by the Federal government. Whether now is the time it all comes due is not yet clear, but it may very well be the beginning of the end of deficits and unrestrained spending.