Ritholtz argues rising bond yields were not the trigger of the 2008 financial crisis
Barry Ritholtz challenges the claim that the 10-year Treasury yield crossing 5% caused the Global Financial Crisis. He presents chronological evidence showing subprime failures preceded the yield spike and identifies leverage, poor underwriting standards, and securitization as the primary causes.
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In a recent post, Barry Ritholtz addresses a recurring narrative that attributes the onset of the Global Financial Crisis (GFC) to rising bond yields, specifically the 10-year Treasury yield breaking through 5%. He argues this view reflects a fundamental misunderstanding of the crisis's underlying mechanics.
Ritholtz supports his position with a short-rate chronology. He notes that while the 10-year yield peaked at 5.26% in June 2007, significant distress was already visible months earlier. Home prices had peaked a year prior, HSBC took substantial subprime charges in February 2007, New Century filed for bankruptcy in April 2007, and ABX indices—tracking subprime mortgage-backed securities—had been collapsing since January 2007.
The author emphasizes that the Bear Stearns hedge funds imploded due to markdowns on their subprime CDO collateral, not because of Treasury yields themselves. He points out that there is nothing inherently dangerous about a 5% yield: rates were above 5% for six weeks in 2007, and had been near 5.25% in mid-2006 without causing any breakage. Furthermore, from 1975 to 2000, the 10-year averaged over 8%, yet no such crisis occurred.
Ritholtz concludes that higher rates only became a contributing factor in an environment where leverage had run amok, toxic assets circulated via securitized subprime junk, and traditional lending standards were abandoned. He asserts that huge leverage, no-doc loans, ultra-low rates, securitized subprime mortgages, and radical deregulation were the primary causal factors, not the level of bond yields.