Pro Perspectives 10/19/22

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October 19, 2022
The U.S. 10-year yield closed today at 4.13%.
That's well above the 4% level, which has proven to be a level that reveals damage in the global financial system.  And the close today is 12 basis points above any close we've seen to this point (in this rate cycle).  
Remember, especially in this post-Global Financial Crisis and Post-Pandemic world, rising U.S. rates moves the anchor for global interest rates — higher. 
It took a breach of 3.30% in the U.S. 10 year, back in June, to put Italy (and the fiscally weak spots in the euro zone) on sovereign debt default watch.   The European Central Bank had to gather, in an emergency meeting, and devise a new bond buying plan to put a lid on sovereign bond yields in Europe — to avert another sovereign debt crisis.   
The first breach of 4% in U.S. yields (in this rate cycle) was on September 28th. 
That day was also the culmination of a 135 basis point, five day run-up, in the UK's 10-year government bond yield. 
That move, those rate levels, revealed UK pension funds to be on a quick path to insolvency.  The Bank of England had to intervene, to avert a financial crisis (which would have been global).
So now we have another new gap higher for the world's benchmark interest rate to digest.  Thus far, the central bank backstops provided in the euro zone and in the UK are keeping bond yields in those respective areas under control.
Where will the next vulnerability lie for the global financial system?  We will probably find out, soon.
As we've discussed dating back to early this summer, when the Fed was beginning to move rates, and when they announced quantitative tightening plans, "history tells us that unforeseen consequences will follow (i.e. something will break in the financial system)."  
The Fed seems determined to break something.
The good news:  History also tells us that the Fed (and other central banks) will respond, with backstops, guarantees, more QE.  "Whatever it takes." 
Speaking of market manipulation, let's talk about energy.
Bad energy policy-making from Western politicians has choked off investment in new oil exploration and production, and regulated away incentives to produce — which has led to structural supply problem.
Add in curtailed supply from a global producer, like Russia.  And cede control on global oil prices to OPEC, via less competition — and you get guaranteed higher energy prices.
What do the politicians do?  They don't change policy, they opt for short term price manipulation.    
The UK government has capped prices on energy for households and businesses.  European Union politicians have their hands all over the energy markets, working on plans to subsidize, backstop and outright control prices in Europe.  And in the U.S., the President just released the last tranche of oil from a 180 million barrel drawdown of the Strategic Petroleum Reserves, in efforts to keep a lid on oil prices.  That's a 28% total drawdown, and the administration left open the option to do more early next year.  
The moral of the story here:  The crises of the past fourteen years have resulted in central banks and governments crossing the lines of what was deemed to be acceptable engagement in free markets.  They don't go back.  They only become more emboldened.