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- US bond market is on the verge of a "major breakdown" that will boost government debt costs and hurt banks, Peter Schiff said.
- That would also send benchmark mortgage rates soaring to 8%, a level unseen since 2000, according to him.
- "The #Fed's gonna need a much bigger rate hike!," he said in a tweet.
The US bond market is on the verge of a meltdown that will send government debt costs spiraling and wreck the loan portfolios of vulnerable banks, according to one expert.
Peter Schiff, CEO and chief economist at Euro Pacific Asset Management, warned of a crash in Treasuries after benchmark 10-year yields jumped above the key 4% level on Thursday, fueling a selloff in US equities. Bond yields move inversely to prices.
A debt-market rout would also see home loan rate surge in line with Treasury yields,, according to Schiff, who predicts the benchmark 30-year mortgage rates to soon hit 8%, a level last seen in 2000.
"The bond market is on the verge of a major breakdown. Not only will this raise the cost of financing the $32.7 trillion National Debt, but it'll crush the loan portfolios of already insolvent banks," he said in a tweet.
Yields on 10-year Treasuries surged as much as 15 basis points on Thursday to touch a high of 4.02% after official data showed the US GDP rose more in the second quarter than economists had estimated. The strength of the economy is fueling expectations that the Federal Reserve could continue to raise interest rates in a bid to cool inflation to its 2% target.
The Fed raised its benchmark rate this week by 25 basis points to a 22-year high, bringing the total increases since the spring of 2022 to a whopping 525 basis points.
The latest bond-market selloff and the recent rebound in global oil prices signal risks that inflation could reaccelerate, adding pressure on the central bank to tighten monetary policy further, according to Schiff. WTI oil futures have rallied 25% from early May lows.
"Surging oil and collapsing bond prices are powerful signs that #inflation pressures are building in the economy. For all #Powell's talk about the #Fed winning its inflation fight, forward looking indicators evidence its losing. How much longer can the #StockMarket ignore reality?" he said.
"The #Fed's gonna need a much bigger rate hike!," he added.
Higher bond rates would also boost the government's debt costs, adding pressure on the country's already-stressed public finances, according Schiff.
US national debt now stands close to a staggering $33 trillion, after jumping by more than $1 trillion since early June - when a political standoff over the government's borrowing limit was resolved. Billionaire investor Ray Dalio warned last month that the US was at the start of a debt crisis.
Schiff also pointed out that a bond-market slide and a general rise in interest rates could hurt more banks – as was the case of SVB's collapse in March. The bank had made large investments in Treasuries, the value of which plunged as the Fed raised interest rates. That spooked the bank's customers and investors, triggering a selloff in its stocks and a run on its deposits and eventually leading to its collapse.