Economist Warns of 1987-like Crash as U.S. Treasury Yields Surge

Peter Schiff, a prominent economist, has issued a stark warning that the U.S. Federal Reserve must take immediate and drastic measures to avert a potential market crash similar to the 1987 stock market crash. In a social media post, Schiff highlighted the rapid sell-off of U.S. Treasuries, with the 10-year yield reaching 4.5% and the 30-year yield hitting 5%. He cautioned that without urgent interest rate cuts and a large-scale quantitative easing (QE) program, the market could experience a severe downturn akin to the 1987 Black Monday crash.

The 1987 stock market crash, known as Black Monday, saw global stock markets plummet, with the Dow Jones Industrial Average (DJIA) falling by 22.6%. This event triggered widespread financial panic and led to an economic recession in the late 1980s. Schiff emphasized that the current bond market collapse is more severe than the stock market crash and could lead to a full-blown financial crisis in the fall if tariffs persist. He suggested that any secret plan by the Trump administration to crash the stock market to lower long-term interest rates has failed, as the bond market is also collapsing.

The sudden sell-off in the U.S. Treasury market has raised concerns about the vulnerability of the world's largest bond market. Traditionally seen as a safe haven during times of turmoil, U.S. Treasuries are now losing their status as a reliable refuge. Concerns about inflation driven by tariffs, investor shifts to cash and basis trades, and speculation about foreign selling of U.S. bonds are cited as reasons for the decline in U.S. Treasuries. This sell-off has also led to a rise in yields for government bonds in many developed markets, including Australia, New Zealand, and Japan.

The impact of the U.S. Treasury sell-off extends beyond the bond market. The 10-year U.S. Treasury yield, often referred to as the anchor for global asset pricing, has significant implications for various sectors of the global capital market. As both the stock and bond markets face challenges, the U.S. dollar has weakened, raising concerns about potential capital outflows from the U.S. market. One of the most concerning areas is the credit market, where the cost of credit default swaps (CDS) for high-yield U.S. bonds has surged, indicating increased risk.

Boaz Weinstein, founder of Saba Capital Management, has warned that the escalating tariff tensions are accelerating the sell-off of corporate bonds, potentially leading to a wave of corporate bankruptcies faster than previous market crises. Weinstein's hedge fund is known for navigating volatile markets, and he predicts that the credit sell-off will accelerate. The impact of Trump's tariffs on U.S. small and medium-sized enterprises is already significant, and if their cash flows are disrupted, a wave of corporate bankruptcies could follow.

The situation has put Federal Reserve Chairman Jerome Powell in a difficult position. With inflation remaining a persistent threat, the Federal Reserve has limited room to implement aggressive monetary easing as it did during the pandemic. However, if the Federal Reserve does not act, investors may not be able to rely on the Trump administration to reverse course and save the market. The urgency of the situation underscores the need for swift and decisive action from the Federal Reserve to prevent a potential financial catastrophe.