Here’s a contrary opinion on interest rates: the bottom is not in and they’re going lower. From the Kessler Companies at kesslercompanies.com:
Donald Trump’s victory sparked a tremendous sell-off in the Treasury market from an expectation of fiscal stimulus, but more broadly, from an expectation that a unified-party government can enact business-friendly policies (protectionism, deregulation, tax cuts) which will be inflationary and economically positive. It doesn’t take too much digging to show that the reality is different. The deluge of commentaries suggesting ‘big-reflation’ are short-sighted. Just as before last Tuesday we thought the 10yr UST yield would get below 1%, we still think this now.
Business Cycle
No matter the President, this economic expansion is seven and a half years old (since 6/2009), and is pushing against a difficult history. It is already the 4th longest expansion in the US back to the 1700’s (link is external). As Larry Summers has pointed out (link is external), after 5 years of recovery, you add roughly 20% of a recession’s probability each year thereafter. Using this, there is around a 60% chance of recession now.
History also doesn’t bode well for new Republican administrations. Certainly, the circumstances were varied, but of the five new Republican administrations replacing Democrats in the 19th and 20th centuries, four of them (Eisenhower, Nixon, Reagan, and George W. Bush) faced new recessions in their first year. The fifth, Warren Harding, started his administration within a recession.
Fiscal Stimulus
Fiscal stimulus through infrastructure projects and tax cuts is now expected, but the Federal Reserve has been begging for more fiscal help since the financial crisis and it has been politically infeasible. The desire has not created the act. A unified-party government doesn’t make it any easier when that unified party is Republican; the party of fiscal conservatism. Many newer House of Representatives members have been elected almost wholly on platforms to reduce the Federal debt. Congress has gone to the wire several times with resistance to new budgets and debt ceilings. After all, the United States still carries a AA debt rating from S&P as a memento from this. Getting a bill through congress with a direct intention to increase debt will not be easy. As we often say, the political will to do fiscal stimulus only comes about after a big enough decrease in the stock market to get policy makers scared.
Also, fiscal stimulus doesn’t seem to generate inflation, probably because it is only used as a mitigation against recessions. After the U.S. 2009 Fiscal stimulus bill, the YoY CPI fell from 1.7% to 1% two years later. Japan has now injected 26 doses (link is external) of fiscal stimulus into its economy since 1990 and the country has a 0.0% YoY core CPI, and a 10yr Government bond at 0.0%.
Rate sensitive world economy
A hallmark of this economic recovery has been its reliance on debt to fuel it. The more debt outstanding, the more interest rates influence the economy’s performance. Not only does the Trump administration need low rates to try to sell fiscal stimulus to the nation, but the private sector needs it to survive. The household, business, and public sectors are all heavily reliant on the price of credit. So far, interest rates rising by 0.5% in the last two months is a drag on growth.
To continue reading: The Secular Trend In Rates Remains Lower: The Yield Bottom Is Still Ahead Of Us
They’ll be right right up until the time that they’re wrong – which is probably more distant than you or I or anyone else whose brain isn’t hard-wired for orthodox Keynesianism (which hard-wiring seems to be in almost all the bond market players these days – maybe that’s because a lot of them are literally ‘hard-wired’) can imagine. I recall looking at the 30-year chart when it was in the 120s and thinking “this is effing insane, this can’t go any further.” The only thing I can now figure stopping it is general price inflation getting too big to ignore. Until then, demand, i.e. central bank balance sheet expansion, looks to be unlimited, which, with buyers apparently forgetting that bond pricing used to include a currency depreciation component, means prices up, yields down. It could be quite awhile before they start to remember, although when the memory finally does begin to return, I suspect it’s going to happen fast.
I’ve had a question for a long time which may sound like snark but isn’t, honestly: For a central bank, an entity that can create at will the units in which a balance sheet is denominated, isn’t the very concept of ‘balance sheet’ irrelevant if not actually meaningless?