Guest Post: Bond Crash of 2013?

us debt bond crash 2013

According to the White House, US economy has been gaining the grounds it lost over the recession and thereafter. The report released by the White House has confirmed that the worst is over and that the economic health of the country is much better as compared to its performance some 4 years back. However, it sounded a bit constraint while claiming about these petty growth rates. Officials from the White House are of the opinion that it will take some more time for the local economy to stand back on its own feet.

As of now, the main obsession of President Barack Obama is to generate jobs and to fortify the fragile economy. He is trying his level best to turn the economy in favor of the burgeoning middle class and offer them all the necessary assistance in order to boost the overall growth of the economy

Consumer debt scenario 2013

On the backdrop of a crouching economy, consumers have increased borrowing loans since December 2012. These loans were taken out to cover educational costs and to purchase cars. However, these consumers have been smart enough to cut back on their credit card bills. From the period spanning November-December 2012, total consumer debt has risen to about $2.78 trillion. As per the findings reported by the Federal Reserve, consumer debt grew up by almost $14.6 billion during the said period and has been called as the highest amount till date.

This growth in the consumer debt was fanned by the increased demand for both auto as well as student loans. Categorically, around $18.2 billion of loans originated in these two sectors alone. As a result, it shot up the total secured debt amount to $1.93 trillion which is considered as single biggest monthly gain since November 2001. However, there is a 17% decline in the amount of credit card bills incurred since July 2008 and so, total credit card debt dropped by $3.6 billion to stand at $850 billion.

Bond market scenario 2013

Being a prominent official of the Federal Reserve, Gov Jeremy Stein has openly claimed that the country’s financial institutions should brace for a bond bubble. He said that it may rock the very foundation of the banks and financial set up of the economy as a whole. According to him high-yield bonds may falter and is expected to crash in the near future. As a result, a number of mortgage financiers may undergo an immense financial crisis. However, his claim ended with an optimistic note. As per his analysis of the current situation, the bond market may not witness a huge drop in its value immediately and so, there’ll be minimal adverse effect on the economy.

In case of banks, it is pretty tough to predict the amount of adverse effect a probable bond crash may have on their revenues. This is because they prefer to invest more on longer-term bonds. These types of bonds have low rate of interests but provide greater return on investments as compared to other bonds. In this case, banks stand to lose if there is a hike in the rates of interests on their longer-term bonds.

However, banks may lose more than they would gain, if the rate of interests increases on their bonds. The data released by the FDIC show that average revenues of banks were just 3.86% from the loans as well as leases owned by them. This has been considered as the lowest income ever, since the FDIC started keeping records from the year 1984.