Inflation Fears Nowhere to be Found in Long Term Treasuries
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34 Comments
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2 years ago
When the USA’s full set of liabilities is accounted for, including the colossal off-balance sheet deficits, there can be no prognosis other than either a default or sustained price inflation. Neither is compatible with current long yields. The marginal returns on new debt are now negative. I can understand that the market foresees prolonged yield repression, but the notion that it could continue for 30 years is beyond credibility. We may have a bogus, greater-fool type market for now, but this market is, as Bill Gross would put it, on a bed of nitro-glycerin. No predictions for when the lid blows off, but it most certainly will, at some point.
2 years ago
Any working definition of “inflation;” in which a central bank and government guarantees to “do what it takes” to make all government bond holders whole, no matter what; somehow lowers it; isn’t really all that economically useful…..
Doesn’t mean lower 30 rates precludes keeping a lid on inflation, as Japan demonstrated. But a government totalitarian enough to have complete license to do whatever it takes to force capital flows where it wants it, can perfectly well keep bailing out arbitrarily favored 30 year holders, while still inflating like crazy.
2 years ago
the bond market is broken. it doesn’t make any sense to try and forecast what will happen in the real world by looking at bond yields.
2 years ago
China anyone? From my seat it sure looks like China is squeezing out some of the speculators. With a series of real estate firms going BK and clamping down on crypto. I know the crypto moves were interpreted as a move against capital flight but there may be more nuance to that move. Is interesting the 10 year shows no signs of spiking even with taper talk, thanks Mish. DDMB and many many others are expecting a spike with the tapering.
2 years ago
I dont know why Mish considers bond yields as indicative of anything when the Fed is buying 120billions per month?
The bond market is broken and yields are whatever Fed wants them to be.
I wish someone could explain the rationale as to why those yields are indicative of inflation in todays situation.
The circular argument where the fed keeps the yields down by adding trillions to their balance sheet and public officials look at the suppressed yields and say, look bond market is saying there is no inflation, lets borrow some more is an inanity.
But things will go on until they dont, I guess.
2 years ago
They’re not. And it’s not just the FED. The majority of buyers are forced buyers. Regardless of price. Central banks sterilizing USD, the FED keeping interest rates down, and primary dealers who have to buy a pct of all new issues. They aren’t buying to make a profit. Demand has nothing to do with interest rates any more.
2 years ago
“The bond market is broken and yields are whatever Fed wants them to be.”
…
No. Influenced? Sure. Markets are complex (think of all variables in weather systems) and respond to ebb and flow from all directions.
2 years ago
More disturbance in the Force at the Federal Reserve. . Randy Quarles looks like he’s on the way out. That’s three in one year, counting Kaplan and Rosengren.
2 years ago
When the ship is sinking, the rats generally depart before it goes under.
2 years ago
Perhaps the questions should be,
1) How long can bond buyers sustain negative real rates?
2) What happens when bond buyers no longer buy bonds with negative real rates?
3) If rates increase because of real demand/supply, and bond prices decrease, what happens to the Fed?
2 years ago
Did you read the latest post by Jonathan Turley?
2 years ago
The 10-year TIPX chart looks like a biotech. Clearly not much consensus on “transitory inflation”. Thoughts anyone?
2 years ago
Retired people define inflation differently than economists do.
2 years ago
Someone shared a chart on this forum that in 2020 pension funds and mutual funds were net sellers of equities and that only households, foreign investors and corporate buybacks were continuing to be net buyers of equities. The chart showed that corporate buybacks were declining. Not sure how 2021 is panning out. The old saying “buy low sell high” is well known, but at peak markets the greatest percentage of investors are buying high. (by nature that is why it is a market high) If households become the only primary net purchasers of equities left, could it be an indicator of a market high. link to i2.wp.com
2 years ago
My understanding of equities minimal, but I know many funds have guidelines … and many have 60 / 40 weighting re stock / bonds.
When stocks go (relentlessly) higher it forces rebalancing.
2 years ago
Thanks, that makes sense
2 years ago
Perhaps pension funds have similar guidelines????
2 years ago
Does this mean that pension funds and mutual funds are forced into buying bonds for rebalancing?
2 years ago
Inflation Fears Nowhere to be Found in Long Term Treasuries
Question is… How much are long term rates being affected (read: “manipulated”) by the Fed still purchasing treasuries at a rate of nearly 1 trillion per year?
2 years ago
From 2014 to 2019 the Federal Reserve was balance sheet neutral. Rates on the long end chopped around before ultimately headed LOWER in response to economic weakness of 2019 – put on hold by covid / massive government stimulus.
2 years ago
Fed QE purchases of Treasury bonds were at a pace of $960 B annually, just over 1/3 of the Fed fiscal 2021 deficit near 2.8T. Hence others must be buying over half of net Treasury issuance. Doubtless, much of this is driven by the near 0 Fed Funds rate, and expectations that this will only increase slowly. Some probably from liability driven investing of corporate pension plans (and other intermediaries with long duration nominal liabilities) , which are happy to take equity risk off the table once equity appreciation results in nearly full funding.
2 years ago
That is a good point. No fund wants to come up short when the music stops.
2 years ago
“Hence others must be buying over half of net Treasury issuance.”
Only half! and that’s knowing there’s effectively a “Fed Put” limiting the downside. At what yield is the bid for the other half if the Fed weren’t buyers? The bond market isn’t truly floating.
2 years ago
“Hence others must be buying over half of net Treasury issuance.”
Only half! and that’s knowing there’s effectively a “Fed Put” limiting the downside. At what yield is the bid for the other half if the Fed weren’t buyers? The bond market isn’t truly floating.
2 years ago
Inflation is always about supply and demand. Not money printing. Although money printing can lead to an increase in demand, so it’s never a direct result of money printing. We’ve been printing since 2007 and we’ve only had much inflation now. The difference is supplies are limited because of covid restrictions.
2 years ago
Looking to add one more small cap energy today, SM….and also one more uranium play, BSENF. My response to a recession is the same as always….keep leverage low, build cash, and look for opportunities. Hopefully it will be another buying opportunity for energy, which is a long term story that I think will play out over the entire next decade.
2 years ago
Maybe the bond markets realize the stock market can’t go up forever and when it corrects it’ll slow down the entire economy. It has to. The largest percentage of people in decades are all in the market so a pullback will hit just about everyone’s pocket.
When that happens, spending and inflation will drop so rates will stay low or go even lower. the reverse wealth effect.
2 years ago
“The Fed is going to hike the US economy into a recession.”
…
I’ll be quite surprise if Federal Reserve can get a hike in before TSHTF.
2 years ago
“What’s the Message?”
…
China
With apologies to GodfreeRobert, China beginning to circle the drain.
Major global implications.
2 years ago
Links to something to read?
2 years ago
A daily grind of Evergrande (+ other developer) not making bond payments.
In the past government would have stepped in (forcefully) by now. President Xi (imo) has decided the time is now to rein in property bubble before it gets worse. He is worried about growing wealth inequality … and having between 70 million to 130 million EMPTY new apartments as investment vehicles might not be such a swell idea.
2 years ago
I agree. China is now where we were in 2007 and they won’t bail everyone out like the US did. They’ll make people pay for stupid mistakes.
2 years ago
We’ll see how this plays out, but interesting so far.
The Chinese government “asked” the Chairman of Evergrande (Hui) to put in HIS money to help make bond payments (a few days ago Evergrande had sold a couple of company jets to raise cash). No way this doesn’t have a chilling effect on all other developers as they no doubt will be “asked” to help out. One thing to make crazy loans when you think government will step in and bail out (and you keep the profit). Quite another if you have to cough up your $$s to cover losses.
2 years ago
Thanks. So far I haven’t seen any evidence that broader credit markets are going to react to the “painful restructuring” in any catastrophic way. Bears watching, of course.