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After a tumultuous week on major stock markets (the Dow Jones index fell by more than 1,000 points in a single trading day), stock prices rebounded somewhat. But the damage on credit markets is irreversible. Despite the fact that, for now, it seems that the correction was short-lived, this was only a taste of what is coming. Interest rates, both short-term and long-term rates, are on the rise and the “junk bond” market is starting to implode. It appears that the floodgates have been opened …

Long-Term Interest Rates Are on the Rise

The blue curve is the 10-year US Treasury rate; the red curve is the 5-year inflation expectations. Interest rates experienced a much sharper increase than the (expected) future inflation. Source: St Louis Fed

Short-Term Interest Rates Are on the Rise, Too

The blue curve is the 2-year US Treasury rate; the green and red curves are respectively the 12-month and 3-month US dollar LIBOR (source: St Louis Fed).

Massive Redemptions at “Junk Bond” Funds

We Have Only Seen the Beginning

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