Long-term Treasury rates broke out of a month-long range…upward, and today above last November’s two-year high at 4.68 percent. Mortgage damage is modest for now, fixed-rate loans still within sight of 6.25 percent, but we are going higher.
The source of pressure is global, having nothing to do with new domestic economic data. The rate rise on Thursday was, if anything, limited by weakish news: February retail sales disappointed, consumer confidence continued to sag, home sales slid for the fourth-straight month, and long rates rose anyway.
Global: the European Central Bank raised its cost of money for the second time, from 2.25 percent to 2.5 percent, and signaled that more hikes are coming. Inflation in Germany is running 2.7 percent; all modern central banks are trying to hold it below 2 percent.
Global: Japan’s consumer prices appear to have risen for the first time in a half-dozen years. During that time the Bank of Japan has kept the cost of money at zero, trying to get out of a deflationary spiral that began 15 years ago. The BOJ this week said that it will soon reinstate a cost of money –- no matter how low, a shock.
Yields rose on all bonds everywhere in response to these changes in foreign central bank outlook, German 10-year bunds to 3.6 percent, and the 10-year JGB to 1.64 percent (after years and years 1.5 percent or lower).
Among the consequences rippling outward: confirmation that a portion of the “yield curve inversion” (short rates above long) has been caused by speculative borrowing in low-rate Germany and Japan to buy high-yielding U.S. Treasury bonds. If ECB and BOJ rates are rising, this “carry trade” is no longer a good idea. Thursday’s breakout was entirely a flight from long bonds, short rates here unchanged, and that sell-off cut the inversion to negligible; a deep inversion presages economic slowdown, while a shallow one is just an event, maybe predictive, maybe not.
That far, the chain of logic makes sense. However, voices are rising to the temptation of what comes next. The loudest say, in varying sequence but always the same elements: “We have warned you for years that foreigners will stop buying our bonds, then sell them, then the dollar will crash, then interest rates here will rise, and the Fed will have to tighten more, which they have to do anyway because inflation is getting worse.”
And we’re running out of oil; the climate is going to hell; Iraq; it’s almost hurricane season again; and a comet could hit any minute.
All in all, a broker-assisted panic attack.
I think a more reasonable train of thought goes like this: high energy prices have caused central banks simultaneously to take out anti-inflation insurance, inevitably running the risk of erring on the tight side. The dollar is not likely to tank because the Eurozone is still running 10 percent-plus unemployment, huge budget deficits, and can’t survive a strong euro now any more than it could last year’s spike.
Japan is in demographic meltdown, its national debt double the U.S.’s as percent of GDP, and it has repeatedly found innovative ways to snuff out its economic recovery. It’s new-found “health” is based on its position at the front end of the China-to-U.S. export conveyor. If anything happens to U.S. demand, the whole globe will slow.
Which, of course, is what’s likely to happen. And, a pool-table break like this is going to produce disorder in the markets, especially during the U.S. turn to slowdown, before its timing, extent and damage are known. We’re overdue for volatility.
It would be nice in a moment like this to hear something useful from Federal Reserve Governor Ben Bernanke, but he seems to have rookie jitters. His maiden speech last week was a political and professorial (duh) snoozer, claiming that low unemployment is not an inflation worry (which not one person in the bond market believes), but did not address a single current risk. I miss Greenspan already.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at email@example.com.
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