US and UK ten year bonds are back to 2007 levels, when the euphoria of the naughties boom led to proclamations of ‘no more boom and bust.’
Fed might not be done however with some suggesting they might hike to 4.4% by the year end or March.
“We are all united in our job to get inflation back down to 2 per cent, and we are committed to doing what we need to do in order to make that happen,” Neel Kashkari, president of the Minneapolis branch of the Fed, said earlier this week.
The economy be dammed, he didn’t say, but he could have well said bonds be damned with demand already lower than expected.
A two-year Treasuries sale of $87 billion in new debt went for 4.29% earlier this week, making government debt a very expensive affair for the first time in a decade and a half.
Moreover, demand was lackluster, with the sale attracting the widest difference — or “tail” — between what was expected just before the auction and where it actually priced since March 2020.
“Until there is more certainty I think we will continue to have this ‘buyers strike,'” said Tom Simons, a money market economist at Jefferies. “The markets are so crazy that it’s hard to price any kind of new [longer-dated bonds] coming into the market.”
That’s in part because markets are not sure just which way Fed plans to go, but the withdrawal of massive liquidity through bond buying in 2020-21 is also having an effect.
That has led to ten year bonds crashing 33%, with the Bloomberg Global-Aggregate Total Return Index Value (Unhedged USD) down 20%, entering the first bear market for bonds since the 90s.
One way to address this crash is for Fed itself to buy these bonds or at least not sell the ones they already have.
But raising interest rates while buying bonds has attracted the criticism of “incoherence,” at the same time as some find bonds more attractive.
Arjun Vij, a money manager at JPMorgan Asset, argued that longer dated bonds are becoming more appealing, stating:
“There’s a decent amount of value that’s been created in the long end — it’s clearly cheap relative to recent history.”
It’s not cheap at all for governments, however, but they’re not quite slowing down their borrowing, especially with the energy crisis leading some governments towards socializing the cost, largely through public debt.
That debt is at its highest levels in nearly a century, and yet neither the US nor UK plan to slow down, instead spending even more on infrastructure, green new deal, or the digital economy.
These are long term capital investments however with expected returns, yet the interest on that debt has to be paid back continuously, and now at expensive rates.
On the other hand, the spending cuts and the tax raises in the 2010s to bring the debt down, especially in UK, only ended up stagnating the economy while not bringing the debt down, but up.
So there’s no way out. The market has to just buy these bonds and hope the capital investment and the re-adjustment between the public and private sector as share of the economy, leads to productivity growth at higher levels than the increase of debt, at least eventually.
And if the markets don’t buy it, then the central bank has to as UK showed recently. Making it unlikely that bonds will get out of hand as such.
However, if interest rates rise further as some suggest, and considering demand for treasuries is already lackluster, it isn’t clear whether a raise in interest rates wouldn’t be counterproductive if it ends up forcing the central bank to buy the bonds.
A move that may well amount to canceling each other out, but some joke Fed’s chair Jerome Powell is raising rates so that he can cut them again, except they state it seriously, claiming Fed needs room to lower rates if the economy turns bad, even if that is caused by the rise of interest rates which makes it all nonsense.
That may be more last decade’s policy however. This decade, the economy is more a matter for the government it appears, while Fed massages the inflation figures and interprets them as they please with rent prices now suddenly a care to anyone.
As they once said: statistics, statistics and interest rates. But if the global role of these economies gives them room to maneuver and even play, emerging markets may be more constrained.
China plans $347 billion in treasury bonds and $42 billion in infrastructure loans even though they’re full of ghost cities and bullet trains that make US look like the last century.
Just how long this debt spending can go on there is anyone’s guess, but their central bank declared victory over bitcoin, so all is fine.
“China’s domestic bitcoin trading volume has dropped significantly in the world. The clean-up and rectification of financial asset trading venues has achieved positive results, and the disorderly expansion and savage growth momentum have been effectively curbed,” the People’s Bank of China said.
Savage. The People. And nowadays we have to say they’re completely right. They have completely, totally, absolutely, and utterly succeeded. Because we really don’t want a 75th ban of bitcoin and that meme ‘but it works’ once again.
Bitcoin however doesn’t know borders, or government policy, when it comes down to it. And so it may well be one of the first to know if anything has gotten out of hand.
For now it seems to think all is good and calm, refusing to go down any further. And maybe it is right. Despite signs of structural changes, we may be more in the midst of a narrative change, a new reality, where trends are perhaps coming to an end as all starts to become a bit too much with it anyone’s guess whether stocks will keep falling, but bitcoin for one seems to think all this is June’s news.
Raising the impossible prospect of asking: what’s the new June? The new trend. In which case a pause for Fed would make sense, but the jury is out on whether the Fed does actually make sense, statistically speaking.