Bonds & Interest Rates

Reserve bank governor Philip Lowe says there is no prospect of a rapid bounce-back in wages growth.

The governor of Australia’s central bank is continuing to emphasise that the record low interest rates fuelling a surge in property prices will be part of the landscape for several years, because there is no prospect of a rapid bounce-back in wages growth.

Philip Lowe used a speech to a summit convened by the Australian Financial Review on Wednesday to signal that the official cash rate will remain at historic lows until “at least 2024” because there is no prospect of wages growth hitting more than 3% before that time.

“The point I want to emphasise is that for inflation to be sustainably within the 2-3% target range, wages growth needs to be materially higher than it is currently,” the reserve bank governor said.

“The evidence strongly suggests that this will not occur quickly and that it will require a tight labour market to be sustained for some time. Predicting how long it will take is inherently difficult, so there is room for different views.

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The size of the stimulus deal is keeping the Treasury market on its toes, with short positions on the securities hitting a record level last week. The yield on the 10-year Treasury was holding around 1.6% this morning on continued bets that extra government spending could overheat the economy. Aside from fiscal matters, investors will also have to digest decisions from the world’s major central banks in the next 10 days. 

Central banks helped save the world economy from depression as the pandemic struck. Now they are dealing with the hard part: managing the recovery amid a difference of opinion with investors.

Optimism that Covid-19 vaccines and continued government stimulus offer an escape from the worst health crisis in a century has sent bond yields soaring and pushed bets on rising inflation in the U.S. to the highest in a decade.

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When the bond market wants to run, it’s going to run much faster than any central banker

In a Flash, U.S. Yields Hit 1.6%, Wreaking Havoc in Markets

After weeks of grumbling, the world’s biggest bond market spoke loud and clear Thursday — growth and inflation are moving higher. The message wreaked havoc across risk assets.

Benchmark 10-year Treasury yields catapulted to the highest in more than a year at over 1.6% and traders yanked forward their opinion of how soon the Federal Reserve will be forced to tighten policy. Equities tumbled, as higher borrowing costs put pressure on soaring valuations. Even Treasury Secretary Janet Yellen felt the sting, with record low demand for a fresh round of government debt.

Speculation is building that a year of emergency stimulus is not only working, but has left some areas of the economy at risk of one day overheating. Locked in the same patterns for months by the Covid-19 crisis, markets now appear to have begun a long-awaited process of repricing themselves, as trillions of dollars of federal spending and positive vaccine results boost odds developed countries will heal faster than central bankers expected.

“The economy is already recovering and a lot of people think that this stimulus proposed is much more than what’s needed,” said John Carey, portfolio manager at Amundi Asset Management U.S. “You put too many coals on the fire and we build the fire to a very intense level. People start to think the Fed won’t be able to keep rates where they are.”

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  1. Economic growth
  2. Raising taxes
  3. Inflation
  4. Reduction of government services.

Cuts aren’t on the table and no indication that economic growth is a priority…so that leaves taxes and inflation…be prepared.

“A country can’t inflate its way out of debt. Inflation raises the cost of living, reduces the real value of incomes, harms creditors at the expense of debtors, raises interest rates. Inflation destroys the value of a currency. Stable money is as important as the Constitution.”
Brian Wesbury, Chief Economist, First Trust Portfolios

 

New Study Finds The Fed Put Is Very Real And Dates Back To The Mid-90s

For some of us, the idea of a Fed put hasn’t even been up for debate over the last several decades. We know it exists and, in fact, most of us believe it is the Fed’s main (and perhaps only) actual mandate: making sure markets only go up.

But that doesn’t mean the rest of the “straights” aren’t catching on a little late. And to them, we say better late than never.

And so now, a new study called “The Economics of the Fed Put” featured in Barron’s appears to show conclusively that the Fed put actually exists. The study’s authors, Anna Cleslak, a finance professor at Duke University’s Fuqua School of Business, and Annette Vissing-Jorgensen, a finance professor at the University of California, Berkeley’s Haas School of Business, found “compelling evidence” of the Fed put dating all the way back to the mid 1990’s.

For their research, the authors looked at “decades’ worth of minutes and transcripts of meetings of the Federal Open Market Committee, the stock market’s performance between those meetings, and the federal-funds rate.” CLICK for complete article

Interest Rates Can’t Rise EVER Again

 

Since the onset of the pandemic, the Fed has entered into the most aggressive monetary campaign. Its goal was to bolster asset markets to restore confidence in the financial system. However, the trap is the Fed is in a position where they can never stop QE as interest rates can’t rise ever again.

As we discussed previously, Jeremy Siegel already declared the end to the 40-year bond bull market.

“History has shown that this liquidity has to come out somewhere, and we’re not going to get a free lunch out of this. I think ultimately, it’s going to be the bondholder that’s going to suffer. That’s certainly not the popular notion right now.” – J. Siegel via CNBC

However, this is not a new sentiment, but it has existed since I started calling for rates to fall below 1% as far back as 2013. The reasoning then, and is the same today, is the linkage between the debt and economic growth.  Read More