Long-term interest rates rose this week, pushed by two forces: first — ick — some good economic news, the bane of all in the bond market, and second by policy change underway at the ECB (European Central Bank) and BOJ (Bank of Japan).
The definitive 10-year T-note has reached a ticklish spot, 1.85 percent, low-fee mortgages just above 3.50 percent.
If 10s break above 1.90 percent, the next stop is 2.25 percent and mortgages about 4.00 percent.
The good news
Good news pushes rates up for fear of inflation and Fed tightening. The “good” this week is thin (hence my belief in the role of foreign central banks, addressed below), but good is here: third-quarter US GDP (gross domestic product) jumping 2.9 percent is splattered all over web headlines this morning, but wildly exaggerated.
If we strip out all the weird parts of a massive report — a big build of inventories, soybean exports (!), shaky housing, healthy business spending but the weakest by consumers in a year — the real figure is about 2 percent.
Perhaps most important, the Fed-favorite “core personal consumption expenditure” measure of inflation slipped from 1.8 percent annualized in the second quarter to 1.7 percent.
The central banks
The central banks. For years, our 10-year T-note has followed the 10-year bonds of Germany and Japan, which have fallen in yield as the ECB and BOJ have bought them all, creating negative interest rates.
“Bought them all” — actually, more than all: the BOJ has bought Japan’s debt at double the rate of issuance; and since Germany has a balanced budget, issuing no net-new bonds, and the ECB’s QE (quantitative easing) must include each European Union nation’s bonds pro-rata to GDP, the ECB must pry German bonds from existing holders.
Both of these central banks have acknowledged in the last two months the failure of negative interest rate policy, “NIRP,” and have diminished bond-buying in their zones. Thus yields on those bonds have risen and pushed ours up: German 10s today are positive 0.169 percent, and Japan’s are barely negative at 0.045 percent. Both have risen the roughly quarter-percent that ours have gained.
NIRP and its cousin, ZIRP (“Z” for zero) have been opposed by a Wall Street passel of stuck pigs, squealing at the harm done to their investment clients and cash savers (nevermind the benefit to stocks), and blaming our non-recovery on the Fed because rates are too low.
Right. And I suppose pigs get fat from not eating.
However, NIRP and ZIRP have harmed banks and especially insurance companies. This harm is gradual sandpapering, not near-term critical. If N-ZIRP were producing economic benefit — forcing banks to lend and consumers to spend — the ECB and BOJ should continue. But there is no evident benefit.
To back away from bond-buying does have evident risk. One of the counters to people so critical of central banks since 2008: you don’t like the result, but how bad would it have been without QE? Just because N-ZIRP does not seem to have helped does not mean its removal will help.
If the ECB and BOJ are departing QE, what’s next? (Cue crickets.)
Next appears to be to punt. We’ve tried all that we can. Nobody likes the last thing we tried. So we need help from other arms of government.
Fiscal stimulus! Spending!! All of the Lefties drool at that. Infrastructure! Pork barrel goodies — useless, but goodies — for every political locale, U.S. and Europe. It’s worked so well in Japan and China that they should do more and we should join them. Uh-huh.
Of course, there is no more money to spend. Idiots think there is because rates are so low that governments can sell an infinite quantity of bonds.
The only buyer for that kind of operation: the central banks. More QE, just without N-ZIRP.
Hope that new spending will create sustainable economic growth fast enough that tax revenue will rise enough to pay interest on all the debt, old and new. And that no one will notice the heaps of debt already too big to be serviced by any conceivable new revenue.
As you might imagine, this line of stimulus thought is disturbing to bond investors. No matter how the central banks accommodate new pork, investors can lose faith in the end game.
Pigs get fat, and hogs are bacon.
The 10-year T-note is now in up-trend. Chart “support” in the 1.85 percent to 1.90 percent February-June range is clear. Break through that going up… no support for a long way up.
The 2-year T-note is gradually giving in to the prospect of sustained tightening after the likely 0.25 percent in December.
This is the Chicago Fed’s national economic index, a pain to read but the tail since 2014 is easy to find. The main thing: no acceleration worthy of Fed interception.
Some market-watchers are having fun at the expense of the Atlanta Fed and its GDP Tracker predicting a 2.1 percent third quarter versus the 2.9 percent actual today from the Department of Commerce. Trust the Tracker.
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at email@example.com.