Are Bond Markets Linked Worldwide Like Stock Markets?

[Robin]

A crash in the US stock market, would probably cause a crash in other stock markets around the world. But if the United States Treasury Bonds crashed, would that cause other bond markets around the world to crash as well.

[John W]

It did in the late 90's with the Russian bond defaults triggering other countries to default on debt.

[JoeyV]

There's usually a "depending on how it happened" phrase on this, but a crash in US Treasury bonds would have huge ramifications in not just bond markets but everywhere else.

First, a crash in US treasury bonds would be nothing like the crash in Russian bonds. When Russian bonds crashed it was because the Russian govt was trying to maintain currency stability by borrowing too much money. Their interest payments were more than their tax revenues so they kept borrowing more money. Eventually they defaulted on ruble-denominated notes. Nothing like that is close to happening here and the US economic policy is much more firmly based than the economy of Russia which had emerged from communism less than 10 years before.

Problem 1: A crash in US bonds mean US "risk-free" interest rates go way up. That means that forward currency market would immediately devalue US currency in forward markets. That would immediately send the price of all commodities traded in US dollars through the roof, including front and foremost oil. A shake-up in oil prices moves everything including bond markets.

Problem 2: The US has been running trade deficits for as long as I can remember (which is pretty long) which means that for every extra dollar we spend on imported goods than we make on exported goods, one dollar goes overseas into some nation's capital account. These dollars are largely Treasury bonds. That means that oodles of countries are holding US Treasury debt as their store of wealth. The more of it you hold when US Treasuries get slammed, the more your creditworthiness goes down.

Problem 3: US Treasuries crash means that currency markets get shaken. In an effort to amke sure that USD doesn't get slammed more than the Euro (which would cause European economies to suffer), the Euro would need to be devalued similarly. That would cause European Central banks to do whatever they could to devalue the Euro. There would be tons of effects on European bonds, especially because some European countries (like Ireland) could really use a good Euro devaluation.

Problem 4: A crash of Russian debt led to credit spreads increasing everywhere. A crash of US debt would send credit spreads nuts. "Flight to safety" usually means to US debt (and less risky things like Swiss franc deposits, Yen deposits, etc). If that wasn't available anymore, Swiss and Japanese rates would go below 0 as their govts desperately tried to figure out how to stop rates from going negative to restore credibility to their monetary systems. Risky debt (like Ireland again) would get obliterated. Gold would go nuts and everyone would be paying $3000/oz for it as nobody could figure out how to store wealth safely.

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Problem 1010: The notional value of all the debt that Americans have written to ourselves would be devalued. Despite the stuff about the capital account/current account above, most Treasury debt is owned by Americans and much of it is "owned" by the govt itself where it represents inter-generational tax obligations. Our social security payments have gone to bomb Iraq and build I-95 and in their place are US Treasury bonds that are supposed to make my kids recognize that they have to pay for my retirement because I spent money bombing Iraq. By devaluing that obligation, maybe everyone will face the notion that it's not worth anything to begin with. Who knows what happens then?