By Anthony Rowley

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The tsunami of liquidity washing through financial markets now threatens to drown us all in a destructive wave. Markets are not directing this excess liquidity in any meaningful way. That much is obvious from their antics in recent days.
It seems that stock markets from New York to Tokyo have been going wild in anticipation of increased financial liquidity on the back of the US Federal Reserve’s decision to cut rates slightly, while long-term bond markets are signalling a retreat that could severely harm the global economy.
Welcome to the madness of markets, just at a time when political stability is lacking – again from the US to Japan – when international trade has been disrupted by US President Donald Trump’s tariffs and when the global monetary order is in flux.
This is not doom-mongering; it is simple common sense compared to the mindless charge of financial markets from pillar to post as they pursue the highest returns that can be found, seemingly regardless of economic and social risk.
Stock markets suffer periodic bouts of “irrational exuberance”, to reference the term popularised by former US Federal Reserve chairman Alan Greenspan, and since Trump made a supposed concession by lowering some tariffs to a point still higher than they had been originally, markets have gone to new extremes.
After just another turn of the market wheel, you might think the truth is that the “liquidity trap” is being spun ever faster by loose credit created in the wake of the Covid-19 pandemic and by the fact that savings – such as those from pension payments – are steadily pouring into stocks.

This cannot go on much longer, even on the back of excess liquidity, because financial markets are eventually forced to recognise economic fundamentals and those fundamentals, from interest rate uncertainties to faltering economic growth, look quite wobbly at the moment.
Bond yields are rising and bond vultures are circling, as some have been warning. What this really means is that long-term bond prices are at risk of falling because of overborrowing by governments and corporations. That is a danger signal.
The layperson can be forgiven for thinking rising bond yields are a good thing, because they suggest investors are getting higher returns. But rising yields also imply capital losses to bondholders – a rather grim outlook for global capital investment.
Soaring stock prices indicate the extent of the current market madness, as indices on Wall Street and elsewhere reach new highs. But in the arcane world of bonds, where yields move in the opposite direction to prices, things are less obvious.

At some US$145 trillion, the worldwide market for fixed income securities (bonds) is significantly larger than equity markets. The bigger they are, the harder they fall. So we should all worry about bonds.
Government bonds form the bedrock of the global financial system. However, not just the US government but also governments around the world, including Japan, are spending and borrowing beyond their means.
As Hung Tran, a senior fellow at the Atlantic Council’s Geoeconomics Centre and a former International Monetary Fund official, recently noted: “High-quality government bonds have played an important role as anchors in the portfolios of central banks’ reserve assets, as well as other large and long-term institutional investors such as pension funds and insurance companies.”
He also observed that “the quality of government bonds issued by developed countries, mainly the United States, has been questioned. Developed countries face fiscal pressures reflecting demands for higher government spending on defence, infrastructure and other needs, while their budget deficits and government debts are already at high levels.”

Meanwhile, it’s not only governments that are growing “another day older and deeper in debt” nowadays. Much of the same now applies to major corporations too. Global corporate debt is a significant and growing portion of the global economy, with the market valued at around US$25.3 trillion as of July, a 5.5 per cent increase from mid-2024, according to S&P Global Ratings. This debt comprises both investment-grade and speculative-grade debt and has seen a consistent long-term increase driven by non-financial issuers, with high borrowing costs posing refinancing risks for both corporations and governments.
Hence bond yields or stated interest rates at issue – also known as coupon rates – are rising ominously higher, in some cases to 25-year highs at the long end of the yield curve, and financial markets are getting increasingly nervous about this trend.
As Jenna Barnard, the head of global bonds at Janus Henderson Investors, recently noted, “bond prices fall when yields rise and vice versa, so recent movements in longer-dated bond yields have led to underperformance (and in most cases negative returns) from this area of the bond market”.
There are still some who cling to the belief that markets are good barometers of future socioeconomic trends. So if this all sounds too gloomy, it is only because the barometer is damaged. There is too much mercury or liquidity in the instrument for it to give an accurate reading of market pressures, and instead it rises in line with investor sentiment to the point where it eventually breaks. That point is near.