May 5th, 2022
Stock and Bond markets are off to a very shaky start this week, with a probable 500 point Dow drop, and the 10 year Treasury yield rising to 3.18%, the highest level since late 2018. Remember yields move inversely with bond prices; as yields go up, bond prices go down.
The scary thing is that the Federal Reserve (the Fed) has only taken its first tentative steps last week in trying to contain inflation with a 1/2 point increase in interest rates. What will these markets do when the Fed follows thru in June with additional 1/2 point increases in interest rates, together with the beginning of $30 Billion monthly sales of Treasury and Mortgage Bonds from their $ 9 Trillion Dollar portfolio?
I think when people look back at this period of market history they will consider Elon Musk’s proposed leveraged take-over of Twitter (TWTR) for $53 per share with Billions of borrowed money, a clear indication of speculative excess. What will happen if Musk’s collateral for these loans, his stock in TSLA, ($865) falls below $800/share; below $700/share?
One gigantic margin call, I would think, and a problem for his bankers, including Morgan Stanley-MS ($84).