Artificially Low Yields Mask Hidden Debt Crisis

The global financial system is facing a hidden debt crisis due to artificially low bond yields. Central banks, particularly in Japan and the Euro periphery, have been keeping yields below market levels by buying government debt. However, this has led to a decline in foreign ownership of government debt.

In Japan, the gap between observed long-term yields and shadow yields is at least 300 basis points, meaning the 30-year yield would be around 7% instead of 4%. This has resulted in low foreign ownership of Japanese debt. Similarly, on the Euro periphery, countries such as Greece, Italy, and Spain have seen a decline in foreign participation due to artificially low yields.

The European Central Bank's (ECB) decision to announce emergency quantitative easing in March 2020 prevented a sharp increase in bond yields. However, this has not addressed the underlying issue of artificially low yields. Foreign ownership is a good indicator of where yields are decoupled from shadow yields, and countries with low foreign ownership are closer to insolvency than meets the eye.