Rising U.S. bond yields may spark Credit Crisis II

Started by CrackSmokeRepublican, May 30, 2009, 07:19:52 PM

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Rising U.S. bond yields may spark Credit Crisis II
Fri May 29, 2009 2:43pm EDT
By John Parry - Analysis

NEW YORK (Reuters) - The global financial crisis may morph into a second, equally virulent phase where borrowing costs rise again, hobbling an embryonic economic recovery, debilitating cash-strapped banks, and punishing investors all over again.

Early warnings signs of this scenario include surging government bond yields, a slumping U.S. dollar, and the fading of the bear market rally in U.S. stocks.

Optimists hope that a fragile two-month rally in world stock markets, a rise in U.S. Treasury yields from record lows during the depths of the crisis in late 2008, and some less scary economic data all signal that a recovery is around the corner.

But gloomy analysts insist that thinking is delusional.

Once Credit Crisis Version 2.0 ramps up, foreign investors may punish the U.S. government for borrowing trillions of dollars too much by refusing to buy its debt until bond prices plunge to much cheaper levels.

The telling harbinger is benchmark Treasury note yields' surge to six-month highs around 3.75 percent this week, as investors began to balk at the record U.S. government borrowing requirement this year.

The U.S. Treasury plans to sell about $2 trillion in new debt this year to fund a $1.8 trillion fiscal deficit.

Heavy selling of U.S. dollar-denominated assets could trigger a full-blown currency crisis and usher in surging inflation, forcing mortgage rates and corporate bond yields up, undermining any rebound in economic activity.

"The financial crisis is a downward spiral with two twists," said George Feiger, chief executive of Contango Capital Advisors in Berkeley, California.

First came the banking crisis and a huge contraction of credit, starting in mid-2007 which resulted in the stock market panic of 2008 which triggered the deepest U.S. recession in at least two decades.

"Once you have got a recession you have good old-fashioned credit losses," Feiger said. "The second leg is now the consequences of the massive recession and it is just now working its way out," he said.

http://www.reuters.com/article/newsOne/ ... 3620090529
After the Revolution of 1905, the Czar had prudently prepared for further outbreaks by transferring some $400 million in cash to the New York banks, Chase, National City, Guaranty Trust, J.P.Morgan Co., and Hanover Trust. In 1914, these same banks bought the controlling number of shares in the newly organized Federal Reserve Bank of New York, paying for the stock with the Czar\'s sequestered funds. In November 1917,  Red Guards drove a truck to the Imperial Bank and removed the Romanoff gold and jewels. The gold was later shipped directly to Kuhn, Loeb Co. in New York.-- Curse of Canaan