Bonds & Interest Rates

Powell’s Fantasy: The Economy Should Grow Faster Than Debt

In recent testimony to Congress’s Joint Economic Committee, Jerome Powell stated:

“The debt is growing faster than the economy — that’s unsustainable. It’s not the Fed’s job to say how the government should cut the deficit, but we need to get the economy to grow faster than the debt. Otherwise, future generations will be paying more of their taxes to cover the government’s debt costs than for other things like health care, etc.

I think the new normal now is low interest rates, low inflation and probably lower growth. Even with the lower interest on its debt, the government still needs to reduce its budget deficit.” 

Interestingly, these were not the first time we heard these words. In 2012, then-Fed Chair Ben Bernanke told Congress:

“Rising federal budget deficits are posing a significant threat to the U.S. economy and are likely to cause a crisis if not brought under control. Having a large and increasing level of government debt relative to national income runs the risk of serious economic consequences. Over the longer term, the current trajectory of federal debt threatens to crowd out private capital formation and thus reduce productivity growth.”

Looking back now, it was clear that Bernanke was correct. Over the last 30-years, the rising level of Federal Debt relative to National Income has retarded Productivity in the U.S. CLICK for complete article

Gold advances beyond $1,470 as US T-bond yields extend slide

  • 10-year US Treasury bond yield erases nearly 2% on Tuesday.
  • US President Trump threatens to raise tariffs if there is no deal with China.
  • US Dollar Index stays below 98 for second straight day.

The XAU/USD pair capitalized on the sour market sentiment in the second half of the day on Tuesday and rose above the $1,470 handle. As of writing, the pair was trading at $1,473.70, adding nearly $3, or 0.2%, on a daily basis.

Earlier in the American session, Bloomberg reported that the US side was softening its stance on the tariff rollback and sides were looking to use the near-deal from May as the benchmark for tariff reduction. Although these comments helped the market sentiment improve slightly, US President Trump reiterated that he will raise tariffs if they failed to reach an agreement on trade with China to help safe-haven assets find demand.

Reflecting the dismal mood, the 10-year US Treasury bond yield is losing nearly 2% on the day and the Dow Jones Industrial Average is down 0.4%.

Meanwhile, after closing the first day of the week in the negative territory below the 98 handle on Monday, the US Dollar Index is moving sideways on Tuesday, allowing the risk perception to continue to drive the pair’s action. The only data from the US revealed that Building Permits and Housing Starts both rose more than expected in October but was largely ignored by investors…CLICK for complete article

The Bond Bubble Is Set To Implode

The world of fixed income trading has been extremely volatile lately. Rates have not only spiked in the Treasury market but borrowing costs in money markets have also become extremely disconcerting. The residual effects from Quantitative Tightening, which ended just this past July, are wreaking havoc on the liquidity in bond markets.  Ironically, the Fed’s erstwhile rate hikes and its QT program–what Fed Chairs described as running in the background and like watching paint dry—turned out to be the catalyst for a freeze in the junk-bond market in December of 2018 and is now causing major disruption in the Repo market.

This illustrates clearly the tenuous nature of the bond bubble and that it will someday implode like a supernova—sending yields skyrocketing on a long-term basis. However, it most likely does not yet mark the start of the epoch debt bubble debacle that is in store. We will need a surge of inflation expectations, or the credit markets to shut down on a protracted basis for that to occur. We are moving closer to that eventuality every day….CLICK for complete

US Treasury Yield Curve Flattest Since December 2018

The US treasury yield curve, as represented by the spread between the 10-year and two-year bond yields, is currently the flattest since December 2018.

As of writing, the spread is seen at 0.097 basis points – down more than 17 basis points from the high of 27.5 basis points seen on July 18.

Notably, the benchmark 10-year yield, which stood at 2% on July 31, fell to 1.59% on Wednesday and is now trading at 1.70%, meaning the yield is down 30 basis points on a month-to-date basis.

Investors have rushed for the safety of government bonds amid escalating US-China trade tensions….CLICK for complete article

Rally Stumbles on Fed Concerns

Stock and bond prices fell on Thursday as forecasts of a more aggressive Fed rate hike declined. This decrease in Fed expectations was driven by a couple of factors, most notably the European Central Bank’s (ECB) rate decision early on Thursday.

The ECB left interest rates unchanged, as widely expected, and also indicated the potential for a rate cut some time this year. However, ECB President Mario Draghi downplayed the need for more drastic easing measures by saying that the risk of recession in Europe is “pretty low.” This language was somewhat of a surprise to analysts and economists who were expecting a more dovish approach. The resulting speculation that the Fed may also be less dovish than expected at next week’s FOMC meeting pressured stocks and bonds….CLICK for complete article

Which Countries Own the Most U.S. Debt?

In the international finance system, U.S. debt can be bought and held by virtually anyone.

In fact, if you hold a U.S. Treasury bond or a T-Bill in your portfolio right now, you are already a creditor to the United States government.

And as you can see in today’s chart from HowMuch.net, foreign countries like China and Japan can also accumulate large positions in U.S. Treasurys, making them significant players in the overall United States debt pie….CLICK for complete article