A glut in the supply of treasury bonds has pushed interest rates up to a seven year high. This has caused the end of a 35 year long bond bull market.



Ten-year yields also appear to have made a double bottom, dropping to 1.38 percent in 2012 and 1.31 percent in 2016, and have ceased forming the lower highs and lower lows that marked the declining yield trend.



So what does that mean?

It means the second longest bond bull market in recorded history, and the longest since the 16th century, has ended.

It means the lowest interest rates in 5,000 years of recorded civilization, have ended and you will never see those rates again.

It means that we have entered an extended bond bear market.



He said the rise in borrowing costs will not be uniform and will be “populated by periodic rallies”, but that generally speaking the market has entered a 10-year trend towards higher interest rates.

“I think we have lived in an era where central banks have distorted yields and they have done it for so long that there’s a group of people who are starting the business who don’t know anything other than distorted yields,” he added.

So why does that matter?

For starters, there's the immediate effect of declining consumer demand.

But the big item, the one that will cause everyone to suck wind, is that marginal borrowers will start to default.

Forget 2008.

It's going to look different this time.

For starters, the next crash won't start with consumers. The reason is because the working class has been on a strict austerity diet for the past decade. That was the cost for bailing out the wealthy in 2008.

Therefore the only working class borrowing excess you'll find is in auto loans, student loans, and credit cards (all of those loans being adjustable). In other words, in the places where they had to borrow.

As for the wealthy? Well, unlike the poor, they took full advantage of the historically low rates.



Corporate America partied like never before on cheap money over the past decade, and now comes the hangover. Companies will need to refinance an estimated $4 trillion of bonds over the next five years, about two-thirds of all their outstanding debt, according to Wells Fargo Securities. This has investors concerned because rising rates means it will cost more to pay for unprecedented amounts of borrowing, which could push balance sheets toward a tipping point. And on top of that, many see the economy slowing down at the same time the rollovers are peaking. “If more of your cash flow is spent into servicing your debt and not trying to grow your company, that could, over time, if enough companies are doing that, lead to economic contraction,” said Zachary Chavis, a portfolio manager at Sage Advisory Services Ltd. in Austin, Texas. “A lot of people are worried that could happen in the next two years."





The high-grade bond market in the U.S. has the lowest credit-quality mix since the 1980s, according to New York-based research firm CreditSights Inc.

“Most companies in this universe really need to refinance,” said George Bory, the head of credit strategy at Wells Fargo Securities.

Corporate America has had record profits for years by starving their workers, but instead of spending it on R&D or just building up a rainy-day fund, they've borrowed up to their chins.



“Interest rates are already doing damage, people just haven’t noticed,” Andrew Lapthorne, the firm’s global head of quantitative strategy, said in an interview Tuesday. “Leverage in the U.S. is grotesque for this stage of the cycle. At the moment you’ve got peak leverage at peak prices. It’s not like you have to dig deep to find a problem.”

So what did corporations spend their money on, if not on R&D or workers? Stock buybacks. And boy is business booming!



J.P. Morgan’s Dubravko Lakos-Bujas projects that the S&P 500 companies could buy back over $800 billion in stock this year. This would exceed the previous 2007 record buybacks of about $650 billion and would be substantially higher than last year’s $530 billion. The $800 billion would be about 3.5% of the $23 trillion of the S&P 500’s market capitalization.



Buying stocks with borrowed money is still just margin speculation, whether it's done by individuals or companies.

Speaking of rainy day funds, guess who's been cutting back on them? Wall Street banks.





Bank of America Corp.’s loan loss reserve, the rainy day fund that banks set aside to cover potential defaults, shrunk at the end of the first quarter to just 1.08 percent of its overall loan portfolio. That’s lower than its lowest point in the run-up to the financial crisis — 1.19 percent in mid-2007. Wells Fargo & Co. currently has the lowest ratio of reserves to total loans of its rivals, at 1.07 percent, though its still slightly higher than the less than 1 percent it was in late 2007. Increasingly, those rainy day funds have become a source not of protection but profits. In the first three months of the year, the nation’s four biggest lenders, which includes JPMorgan Chase & Co. and Citigroup Inc., drained a collective $993 million from their their loan loss reserves, boosting bottom lines. Wells Fargo accounted for nearly two-thirds of that, lowering its loan loss reserves by $631 million in the first quarter. Wells Fargo also booked a provision for loan losses in the quarter of just $191 million, another way to boost profits. That was by far the smallest of all the big banks. Citi’s loan provision in the quarter was nearly 10 times larger at $1.8 billion, but that, too, was down from the $2 billion in the prior three months.

The famous saying by Warren Buffett is "You don't know who's swimming naked until the tide goes out."

Rising interest rates in a debt-saturated economy is the same as the tide going out.

Those rising interest rates have translated into the flattest yield curve since August 2007, the moment that the credit crunch first struck.