Bonds & Interest Rates

Rabo: Will This Look Like The 2013 Taper Tantrum… Or The 1994 Bond Massacre?


The Fed-dy Bears’ Picnic

“If you go down in the bonds today; You’re sure of a big surprise

If you go down in the bonds today; You’d better go in disguise!

For every bear that ever there was will gather there for certain

Because today’s the day the Fed-dy Bears have their picnic

Picnic time for Fed-dy Bears; The little Fed-dy Bears are having a lovely time today

Watch them, catch them unawares; And see them picnic on their holiday

See them gaily gad about; They love to play and shout; They never have any cares

At 6 o’clock this trading fad-dy; Will put its books to bed; Because they’re tired little Fed-dy Bears

Every Fed-dy Bear who’s been good is sure of a treat today

There’s lots of marvellous things to tweet and wonderful games to play

Beneath the trees where *everyone* sees; They’ll hide and seek as long as they please

‘Cause that’s the way the Fed-dy Bears have their picnic”

We have a long wait ahead of us for a critical Fed meeting and one has to kill the time as productively as one can: I apologize for nothing. Yes, we can focus on weak US retail sales and industrial production data yesterday, which is bond bullish; we can focus on the risk-off North Korea leader’s sister stating “We take this opportunity to warn the new US administration trying hard to give off gun powder smell in our land” (which was not about flatulence); or the latest suggestion that US officials will bring up Hong Kong and Taiwan when they meet Chinese officials in Alaska tomorrow, which is hardly risk on. You can even mention that Germany seems to have the same negotiating tactic with the US over Nordstream2 as North Korea does with its nukes: just keep building and expect the Americans to eventually live with it.

But the long and the short of it is that it’s all about the Fed, and if they display any sign at all of shifting the dot plot towards rate hikes from as early as 2023. That’s especially true given the possibility this will be a period following not just the USD1.9 trillion stimulus package, but a USD2.0-2.5 trillion infrastructure bill too – in which case one would suppose the underlying pressure for higher rates would be strong…if things still work the way the textbook says they are supposed to re: liquidity > investment > wages > inflation. Which they clearly don’t right now.

One of the big headlines is that following a UK court loss, Uber are reclassifying their 70,000 British drivers as workers rather than self-employed capitalists en route to global transport domination. This entitles them to benefits, which would be a pay rise in kind. Is this the harbinger of labour winning vs. capital? Consider that Uber are claiming this only covers time spent driving, so waiting around for a fare doesn’t count towards pay: does that sound like a strongly-unionised working environment? As the grandson of a cabbie, it sounds like being a taxi-driver. (Uber will potentially have issues with VAT payments due to the government: but that’s another story.)

Back to the Fed. As I’ve already noted recently, it would be odd if they tried to flag inflation concerns given the Treasury are arguing these are “small” and “manageable”: surely they won’t want to show any policy disconnect? As such, and like the RBA just did, the risks appear that most members still won’t flag rate hikes by 2023 despite the recent upturn on overall data, on the US vaccination effort, in commodity prices, and in fiscal stimulus.

In which case, while short end bond yields would of course stay low, the risks are also that long yields react further to all this “running hot”. So, yes, it could be picnic time for Fed-dy bears. Could this look like the 2013 Taper Tantrum, where US 10s jumped 136bp (to 3.06%)? Could it even look like the 1994 Bond Massacre, where US 10s leaped 245bp trough to peak (to 8.05%)? However, before one gets ‘Uber-excited’, the fact that one peak was 8.05% and another was 3.06% shows you just what happened to the US structurally in the two decades in-between. It’s going to take a lot of US infrastructural changes, in many senses of the term, to get us back towards anything close to 2013 US yield levels, let alone 1994.

Nonetheless, in the meantime the rest of the world has followed that general yield collapse and new-normal path, and hence even a moderate move higher in yields could be painful – and not just to bonds. Yes, there are US stocks to worry about. But also note the headline ‘China braces for “turmoil in financial markets” following new US stimulus’. Of course, it’s not the only one. Key EM are now having to actively think about raising rates despite still being in the throes of the Covid epidemic. The higher US bond yields go, the more capital could flow back to the US and USD. That’s one form of turmoil – and very 2013.

Yet even if the Fed does not provide a picnic for bond bears today, via some form of curve action to match the dot plot, we still get turmoil anyway. How well are EM (and DM) set up for a much weaker USD (and yet higher commodity prices), for example?

It was to be expected, if deeply ironic, that Chinese officials oppose a US fiscal deficit of over 15% of GDP; the promise of massive infrastructure spending; all backed by a pliant central bank; with aims of social stability; and suggestions of protectionism to lock this liquidity in; and hopes the currency moves lower. Takes one to know one? But rather than accept the expected flood of hot capital inflows –pushing up CNY, blowing bubbles, and seeing jobs exported along with manufacturing– suggestions are they will encourage more capital to flow straight back out again. In which case, it’s more of a Fed-dy bulls picnic globally. But somebody is going to end up with an over-valued currency, hitting exports, and assets, hitting financial stability.

There are many other ways this can play out too, depending in large part on how the US reacts – but all of them suggest the risk of significant market and geopolitical volatility, to which today could well be a key milestone.

But that’s enough for now. I am a tired little Fed-dy bear, and today will likely be no picnic.


Stimulus Addiction Disorder (SAD): The Debt-Disposable Earnings Pyramid


For those who suspect the status quo is unsustainable but aren’t quite sure why, I’ve prepared a simple chart that explains the financial precariousness many sense. The chart depicts the two core elements of a debt-based, consumerist economy: disposable earnings, defined as the earnings left after paying for essentials which can then be used to service debt and debt.

In other words, if all the household earnings are spent on non-discretionary expenses (rent or mortgage, taxes, food, utilities, healthcare, etc.) then there is no money left to pay the interest and principal on a loan. Lenders consider this household uncreditworthy for the simple reason that their earnings cannot support the monthly nut of debt service (interest and principal).

Full Article

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.

Full Story



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.

Full Article



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.”

Full Article



  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