- Sovereign bond yield marks the next step in an ultimate global resolution, but one which none of us can predict in timing, character, or scope.
- Since 1990 the West (to include Japan) has been borrowing furiously to defend social-spending promises which cannot be supported by GDP (gross domestic product) growth.
- That scene is the reason that markets are looking right through central bank efforts to drive them away from sovereign safety. Piling in more every day.
So, what’s the big deal with a five-one-hundredths percent decline in the yield on 10-year T-notes? What does sovereign bond yield have to do with anything?
It marks the next step in an ultimate global resolution, but one which none of us can predict in timing, character, or scope.
But, think big. Earthquake. Tectonic.
Not necessarily an apocalypse! Not at all. The jolt when it comes will likely be progressive, moving from one nation/region to another, and with only moderate luck will accelerate a long-deferred process of rationalization and healing.
Back to the 0.05 percent drop. The all-time low yield on 10s was 1.45 percent on July 26, 2012, pushed down by the Fed’s aggressive bond-buying in QE3. Since then 10s have mostly traded above 2.00 percent. Until this spring.
At the New Year everyone knew 10s would rise from 2.24 percent, but they promptly fell to 1.70 percent in February, and tried that level again in April and May, and could not break lower.
Did last week. On Thursday, 10s broke to 1.65 percent and show every sign of going lower. All news media on Friday run stories on a new-record global decline in sovereign bond yields, German 10s to 0.022 percent, Japan to deeper-negative minus-0.153 percent, UK 1.23 percent, France 0.039 percent…a long list. The cause is partially clear: a slowing global economy, the World Bank and IMF in new downgrades (continuous now).
Asserted, but not true: the record lows are the result of bad policy at central banks.
The straight tale: The financial crisis of 2008 was symptom, not cause. Since 1990 the West (to include Japan) has been borrowing furiously to defend social-spending promises which cannot be supported by GDP (gross domestic product) growth. And China has attempted unsustainable growth (undercutting the West) via unsustainable debt.
The four key central banks — Fed, ECB (European Central Bank), BOJ (Bank of Japan), PBOC (People’s Bank of China) — have done all they can to prevent a debt collapse, but all they can do is to buy time. The extreme adaptability of the U.S. has brought real recovery, but also half of U.S. households failing in global competition. The other three regions have not adapted at all, for different reasons.
When credit markets see a debt collapse ahead, they run to quality: The ultimate safe-haven is sovereign debt, rates falling for three decades. All four central banks have done circus acts to drive cash away from sovereign debt and into productive investment. But the world is drowning in capacity, new investment often pointless.
The second-to-last circus act has been negative rates. Except as a currency tool for small nations, the experiment is a bust, but the ECB and BOJ do not dare to back away. Astride the tiger they dare not dismount.
Europe could get out of this by dropping the euro. Chaos for a time, then healing. China shows every sign of political distress, its freedom of action lost, much slower growth ahead.
Japan will default on its sovereign debt. Before that Japan may try the last circus trick, helicopter cash; but enough of it is just another form of default.
That scene is the reason that markets are looking right through central bank efforts to drive them away from sovereign safety. Piling in more every day.
Here in the U.S., effects are perverse. Based on U.S. conditions, the Fed has every reason to tighten. We will soon see outsize wage growth in job classifications, which are short of qualified workers, but we can reasonably hope that won’t produce dangerous inflation, and will in time produce more qualified workers.
The Fed is now paralyzed and has done a terrible job explaining its situation. The worst: “Markets underestimate future rate hikes.”
The several who have repeated this line might do better to watch some markets. The Fed cannot conceivably embark on a tightening campaign opposite to all overseas banks — the stresses would be fatal.
Frightened foreign money is pouring in here, pulling U.S. rates down and supporting an overbought stock market. The Treasury this week auctioned $42 billion in new 10- and 30-year bonds, and overseas bidders took three-quarters.
Crazy-low U.S. mortgage rates figure to creep lower, which may bubble some local housing markets, but the overall housing recovery is still thin, and we’ll take the help.
The 10-year T-note five years back. The serial attempts to break 1.70 percent are plain.
For clarity, 10s in just the last year, and this week’s break.
The Fed-sensitive 2-year T-note two years back. By the way: ignore the Fed funds futures market — Treasury 2s are a much better indicator. This chart is on the threshold of an important signal: you can see recent descending tops and ascending bottoms, a “wedge” formation which must break soon one way or the other.
The Fed’s new labor index — created at the behest of Yellen — says that all of the Fed’s tighten, tighten, tighten rhetoric in the last two years has been one of its most unfortunate intervals, and even December’s dinky 0.25 percent hike ill-advised.
The ISM is the Institute for Supply Management, the re-named purchasing managers’ association. They survey their members at the end of each month, and have a fine record tracking the economy — over time services becoming more important than manufacturing. If the ISM trend does not reverse quickly, and the labor index above as well….
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at email@example.com.