New York, Jay Hatfield, CEO & Fund Manager ~ We believe the recent sharp sell-off in global government bonds was caused by a sharp reduction in the Global Monetary Base (see the chart below for supporting details). We are forecasting that 10-year treasury rates are finding a top in the 4.25% area as we believe that Europe is heading into a recession as the ECB continues to pursue ultra-tight monetary policy by both raising short-term interest rates aggressively and executing a very aggressive quantitative tightening. In fact, the ECB has reduced its monetary base by over $500 billion during the last two months. We believe that this enormous base reduction is the primary driver behind the recent global sell-off in bonds.
However, the Eurozone economy is very vulnerable to a recession with GDP only growing by .2% over the last 3 quarters. The effect of the ECB’s aggressive monetary tightening has not yet been fully reflected and is likely to lead to a significant recession. The European mortgage market has a very significant exposure to floating rate mortgages particularly in Southern Europe, which is likely to cause a reduction in consumer spending as the full effects of rate increases are felt. The Eurozone PMI came in at 47 vs. expectations of 48.5 on Wednesday (8/23), which caused a rally in the Global Government Bond market.
The recent rise in rates has been global and the key driver of that decline is tight global monetary policy with the global monetary base dropping by $750 billion or 2.9% over the last 2 months led by the ECB reducing the monetary base by an unprecedented $675 billion.
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