A $7.6 Trillion Hangover Awaits Bond Markets in 2012

Bond yields are likely to rise in 2012 not for any other reason than simple supply and demand issues.  the major economies of the world all have a staggering amount of debt maturing in 2012 that will need refinancing.

The Japanese will have to issue $3.3 trillion followed by the United States’ $2.8 trillion.  The size and frequency of the bond auctions will wreak havoc on all markets as primary dealers will have to shift their capital around to be liquid enough to absorb supply.

The bottom line is that the cost of borrowing will rise and this, in turn, will put an end to the idea that the central banks actually set interest rates as opposed to following the market’s lead.  In the face of all of this new debt needing to be issued will be the latest round of bond buying programs by the central banks to keep the Western economies from imploding.

Brace yourselves for the latest euphemism for money printing, Nominal GDP Targeting which will replace Quantitative Easing in 2012.  This will be the term used by the Federal Reserve to cover themselves as they paper over the credit deflation that is currently underway.  More downgrades of sovereign debt will have to occur, especially for Europe.

Increased amount of money to borrow at increasing costs to do so, some estimates place the rise at 39% over 2011, will not be conducive to economic growth no matter what numbers the governments print up, which will be worth about as much as the money they print.

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Tom Luongo

About Tom Luongo

Tom Luongo is a professional chemist and self-taught economist who has been following and trading stocks for nearly 12 years. He has no formal ties to the financial industry and considers that an asset in his analysis of the interplay between monetary policy and capital markets.

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