Goldman Sachs and JPMorgan Chase "speak with one voice": The sharp rise in US interest rates will cause trouble in the financial markets!

Wall Street's long-awaited halt to rate hikes seems to have been dashed. In its place is a harsh reality of "higher and longer".

However, despite the current strong state of the US economy, can we really achieve "never landing"? History reminds us that the Federal Reserve's tightening cycles always end in tears. As Michael Hartnett, a Bank of America analyst, puts it:

"The tightening cycle always ends with the default and bankruptcy of governments, corporations, banks, and investors."

Two major Wall Street banks have issued warnings: Goldman Sachs and JPMorgan analysts have both pointed out that further rate hikes could jeopardize financial stability in the United States.

Goldman Sachs and JPMorgan sound the alarm

David Lebovitz, from JPMorgan Asset Management, stated in a media interview:

"If rates continue to rise as they are now, it will lead to a financial disaster and force the Federal Reserve to act in the opposite direction."

He believes that if yields continue to climb, the Federal Reserve may eventually be forced to lower rates.

Mislav Matejka, JPMorgan's Global and European Equity Strategist, also stated in a recent report that bond yields are unlikely to continue rising for much longer and may eventually decline.

In addition, Adam Crook, a Goldman Sachs analyst, wrote in a recent report:

"There are significant risks of further tightening in the financial environment until something happens. As the market struggles to find the right level of bond liquidation, all roads seem to lead to continued selling of US bonds: There seems to be no marginal buyer for long-term bonds; the hawkish Federal Reserve only indicates that the US economy can withstand higher rates for a longer period than other countries; oil prices face upward risks; the US government is expected to maintain high deficits in the foreseeable future; the Bank of Japan may end YCC/negative interest rates, removing the last anchor for global yields."

Meanwhile, Alan Stewart, Co-Head of Foreign Exchange Trading at Goldman Sachs, also emphasized the risk of a rate collapse:

"The most vulnerable market sensitivity still seems to be the continued expansion of core yields. Although the September correction brought some hope with 10 weeks of continuous selling of major US bonds and simultaneous financial tightening, we saw a similar but temporary correction in nominal yields at the end of August, followed by a resumption of tightening in September, which gives us ample reason to remain cautious."

Rising rates bring increased risks

On Tuesday, the yield on the 10-year US Treasury note rose 5 basis points to 4.848%, hitting a 16-year high, while the yield on the 30-year Treasury note rose even higher by 16 basis points, approaching 4.95%. The yield on the 2-year Treasury note reached 5.156%, rising 4.4 basis points intraday, close to the over 17-year high set on September 21st. In the first half of the year, the bankruptcies of Silicon Valley Bank and Credit Suisse serve as a reminder that the regional banking crisis at that time was caused by a sharp drop in bond values due to interest rate hikes, resulting in significant unrealized losses for small and medium-sized banks.

Today's financial conditions are even tighter than before. The banking industry currently has the Federal Reserve's BTFP policy tool as a backstop, so there is no immediate risk. However, the BTFP mechanism will expire in six months. The negative impact of high interest rates on the financial market may further transmit in the future.

According to quarterly data released by the Federal Deposit Insurance Corporation, as of June 30, the unrealized losses on investment securities held by US banks amounted to $558 billion. However, due to many banks choosing not to reinvest maturing bonds, this figure is actually lower than the peak in the third quarter of 2022. However, with the rise in summer yields, it is expected that unrealized losses will continue to increase.

What is even more worrying is that despite the increasing signs of pressure in the financial market, policy responses still tend to be tightening. Financial blog Zerohedge warns that the United States is getting closer to a crisis created by Federal Reserve policies.