Tag Archives: Bond Yields

Status of Social Security and the Trust Fund, Fiscal 2021: Beware of Vicious Dog, by Wolf Richter

Posted on November 12, 2021 | Leave a comment

The Social Security Trust Fund is not in good shape, and if inflation picks up from where it is, it will eviscerate both the fund but the expectations of millions of its beneficiaries. From Wolf Richter at wolfstreet.com:

Biggest COLA since 1982 already eaten up by inflation.

The Social Security Trust Fund – the Old-Age and Survivors Insurance (OASI) Trust Fund – closed the fiscal year 2021 at the end of September with a balance of $2.76 trillion, down by 2.0% from a year earlier ($2.81 trillion), according to figures released by the Social Security Administration. After large increases in the prior decade, this was the second annual decline of the Trust Fund since 1990; the first occurred in 2018 (-0.8%).

The Disability Insurance Trust Fund is by law a separate entity from the OASI Trust Fund, and is not part of this discussion here.

The OASI Trust Fund invests exclusively in Treasury securities. At the end of the fiscal year, it held $2.73 trillion in interest-bearing long-term special issue Treasury securities and $22 billion in a short-term cash management security, called “certificates of indebtedness.” These securities are not traded, and so their value doesn’t change from hour to hour, and they don’t need to be marked to market because the Trust Fund purchases them at face value, and the US Treasury redeems them at face value.

By investing on autopilot in Treasury securities that are not exposed to the market, the Trust Fund follows an ultra-low-risk strategy and operates with ultra-low administrative expenses, amounting to just 0.14% of the assets in the fund.

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Soaring Debts and Plummeting Yields… by David Stockman

Posted on July 18, 2021 | 1 comment

It should be a supply-and-demand thing—an increasing supply of debt should drive interest rates up to attract marginal funding. Not, however, when yield-insensitive central banks can buy unlimited amounts of debt. From David Stockman at davidstockmanscontracorner.com via lewrockwell.com:

After decades of unhinged money-pumping, the Fed has driven real interest rates so low that there are no more bond investors — just traders and suckers.

The former have driven the 10-year yield in recent days to just 150 basis points in nominal terms (and deeply into the red in real terms in the face of surging monthly inflation numbers), because they are “pricing-in” one thing and one thing only: simple and supreme confidence that the spineless fanatics who occupy the Eccles Building will keep buying $120 billion per month of government and quasi-government debt.

Real Yield on 10-Year UST, 1985–2021

These are no longer even “markets” by any historical sense of the term. The bond markets and the stock exchanges are just mindless gambling casinos.

Inflation-adjusted yields had previously meandered around the 10%+ level for several decades. But no more. The real yield is so low that yield starved fund managers are throwing caution to the wind and setting themselves up for massive future losses.

That’s not an honest price discovery. It’s the crazed trading that has been fostered by fanatical central bankers who have literally lost touch with history, reality and every canon of sound finance.

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Rising bond yields threaten financial markets, by Alasdair Macleod

Posted on May 7, 2021 | Leave a comment

There is no worse investment on the planet right now than longer-term bonds. If something else doesn’t upset the apple cart first, rising interest rates will raze the financial house of cards, to mix metaphors. From Alasdair Macleod at goldmoney.com:

There is a growing recognition in financial circles that price inflation will increase significantly in the near future, and official estimates that it will be a temporary phenomenon limited to an average of 2% are overly optimistic. There is, therefore, increasing speculation about the need for interest rates to rise.

The bond yield on 10-year US Treasuries has already more than doubled over the last year. It is in the nature of market cycles for equity and other financial assets to continue to rise in value during an initial increase in bond yields. It is the second increase that can be expected to turn bullish optimism about the economic outlook into the beginning of a bear market. Financial markets, already dislocated from fundamental realities, appear to be acutely vulnerable to such a change in sentiment.

This article points out that equity markets are driven more by money flows rather than perceived economic prospects. Bank credit for industry is contracting, commodity prices are soaring, and supply chains remain disrupted. Fuelled by earlier expansions of money supply and further expansions to come, the world faces a far larger increase in price inflation than currently contemplated, and therefore far higher interest rates, threatening to destabilise both financial markets and fiat currencies.

Introduction

There is a rustling in the undergrowth, disturbing the sylvan setting where we complacently enjoy the dappled sunlight, innocently unaware of the prowling bear. The bear heralds another rise in bond yields as we grapple with the inflationary consequences of recent and current events.

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Investors Do Not See “Transitory” Inflation, by Daniel Lacalle

Posted on May 4, 2021 | Leave a comment

If the majority of bond investors thought that current inflation wasn’t transitory, that it was going to stick around for a while, they’d leave the current yield curve in the mirror in a heartbeat and rates would be heading much higher. Which is why so many people put the word transitory before today’s inflation. The government certainly can’t afford higher interest rates. From Daniel Lacalle at dlacalle.com:

The Federal Reserve and European Central Bank repeat that the recent inflationary spike is “transitory”. The problem is that investors do not buy it.

Investors Do Not See “Transitory” Inflation

Inflation is always a monetary phenomenon, and this time is not different. What central banks call transitory effects, and the impact of supply chains are not the real drivers of inflationary pressures. No one can deny certain supply shock impacts, but the correlation and extent of the increase in prices of agricultural and industrial commodities to five-year highs as well as the abrupt rise of non-replicable goods and services to decade-highs have monetary policy to blame.  Injecting trillions of liquidity makes more funds chase fewer goods and the rise in the real inflation perceived by citizens is much larger than the official CPI.

Take food prices. The United Nations Food Price Index is up 30% in the past five years and up 10% year-to-date (April 2021). The rise in food prices already caused protests all over the world in 2018 and it continues to reach new highs. The correlation in the price increase of most agricultural goods also shows that it is a monetary effect.

The same can be said about the Bloomberg Commodity Index which is also at five-year highs and up 15% year-to-date.

Yes, there have been some supply disruptions in a few commodities, but it is not widespread let alone the norm. If anything can be said is that the rise in agricultural and industrial commodities is happening despite the persistent overcapacity that many of these had already before the pandemic. We should also remember that one of the unintended consequences of massive monetary expansion is perpetuation of overcapacity. Excess capacity is refinanced and maintained even in crisis times. Therefore, we can argue that the rising cost of goods is not coming predominantly from supply shortages but in an environment of extended overcapacity, making it even more evident a monetary phenomenon.

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Cradle-to-Grave Stimmy: How We Got Here, by David Stockman

Posted on May 3, 2021 | Leave a comment

If you’re wondering where all the money comes from, it comes from the central bank, which exchanges its debt instruments, called Federal Reserve Notes, for the government’s debt instruments. If this sounds like hocus pocus, it’s because it is hocus pocus. From David Stockman at stockmanscontracorner.com via lewrockwell.com:

You would think that knuckleheads like Senate GOP Leader Mitch McConnell would finally wake up. Last night the biggest spender since LBJ and FDR combined laid-out Part 3 of a $6 trillion in 100 days spending spree – which comes on top of the Donald’s $4 trillion fiscal bacchanalia last year. Yet the bond vigilantes barely wiggled their small toe.

Indeed, at 1.65%, the 10-year UST is still buried deep below the running inflation rate, which rate itself is on the verge of liftoff.

Still, today’s negative 50 basis point real yield on the benchmark UST is only the culmination of a 30-year campaign by the Greenspan Fed and his heirs and assigns to destroy honest price discovery in the bond pits on the misbegotten theory that cheap debt fosters growth, prosperity and wealth.

No, what it actually does, among countless other ills, is unshackle the politicians to bury future generations in unspeakable debts.

Thus, if the real spread on the 10-year (purple area) was even +200 basis points, as it was at the turn of the century, the 10-year UST would now be yielding 4.25%. At that level, even Easy Janet (Yellen) would not have blessed Sleepy Joe’s $6 trillion spend-a-thon and centrists like Senator Manchin would have been a lot more than merely “uneasy” upon its presentation to the Congress.

33-Year Destruction of Honest Bond Prices by the Fed: 10-Year UST Yield Minus Inflation

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How A Small Rise In Bond Yields May Create A Financial Crisis, by Daniel Lacalle

Posted on March 16, 2021 | Leave a comment

With the world up to its eyeballs in debt, any rise in interest rates is both painful and capable of causing a chain reaction of financial failure. From Daniel Lacalle at dlacalle.com:

How can a a small rise in bond yields scare policymakers so much?

Ned Davis Research estimates that a 2% yield in the US 10-year bond could lead the Nasdaq to fall 20%, and with it the entire stock market globally. A 2% yield can cause such disruption? How did we get to such a situation?

Central banks have artificially depressed sovereign bond yields for years. Now, a small rise in yields can cause a massive market slump that evolves into a financial crisis.

Quantitative easing was designed as a tool to provide liquidity to a scared market and benefit from exceptionally attractive valuations of the lowest-risk assets, sovereign bonds. Central banks would cut rates and purchase these high-quality, low-risk assets from banks, thus allowing financial entities to lend more to the businesses and families and strengthen confidence in the economy. Once financial conditions improved, central banks would reduce their balance sheet and normalize policy. This never happened.

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The Fed’s Irresponsible Rate Cut Accelerated Panic, by Daniel Lacalle

Posted on March 11, 2020 | Leave a comment

Central banks can’t cure what ails the economy and financial markets and they’re just going to make things worse. From Daniel Lacalle at dlacalle.com:

The monumental mistake of the Federal Reserve cutting rates this week can only be understood in the context of the rising God’s complex of central planners. An overwhelming combination of ignorance and arrogance.

Less than a week ago, several members of the Federal Reserve board reminded – rightly so – that cutting rates would not have a significant impact in a supply shock like the current one. We must also remember that the Federal Reserve already cut rates in 2019 and inflated its balance sheet by 14% to almost all-time highs in recent months, completely reversing the virtually nonexistent prior normalization. Only a few days after making calls for prudence, the Fed launched an unnecessary and panic-inducing emergency rate cut and caused the opposite effect to what they desired. Instead of calming markets, the Federal Reserve 50 basis points cut sent a message of panic to market participants. If the jobs and manufacturing figures were better than expected, and the economy is solid with low unemployment, what message does the Fed transmit with an emergency cut? It tells market participants that the situation is much worse than it seems and that the Fed knows more than the rest of us about how dire everything can be.  A communication and policy mistake driven by an incorrect diagnosis: The idea that the market crash would be solved with easy monetary policy instead of understanding the impact on stocks and growth of an evident supply shock from the coronavirus epidemic.

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Very Deflationary Outcome Has Begun: Blame the Fed, by Mish Shedlock

Posted on March 9, 2020 | Leave a comment

Central bank inspired asset price bubbles eventually pop, and popping bubbles are deflationary. Today the 30-year bond yield dropped intraday to .6987 percent, which certainly suggests deflation. That may be the low for yields, but the economy is going to follow the stock market and that also suggests deflation. And look whats happening to the oil market. Watching the Federal Reserve’s balance sheet, people have been expecting inflation since the last financial crisis. Wouldn’t it be just like markets if we got debt deflation and depression instead? It might mean we don’t get that new high in gold many are now predicting. From Mish Shedlock at moneymaven.io:

The Fed blew three economic bubbles in succession. A deflationary bust has started.
Flashback January 6, 2020

Ben Bernanke Just Won’t Stop Making a Fool Out of Himself

Former Chairman Bernanke says Fed Has Many Tools to Deter Recession.

Dear Mr. Bernanke

Please do yourself a favor and stop making a fool out of yourself.

For starters, let me point out it was indeed impossible to unwind the Fed’s balance sheet. How far did you get? And what is the Fed doing now?

Secondly, you would not know inflation if if jumped up and spit you in the eye. You and your group-think buddies never consider asset bubbles as inflation.

Economic Challenge to Keynesians

Of all the widely believed but patently false economic beliefs is the absurd notion that falling consumer prices are bad for the economy and something must be done about them.

My Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.

BIS Deflation Study

The BIS did a historical study and found routine deflation was not any problem at all.

“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the BIS study.

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“The ECB Is Basically Giving The Finger To Italy”: Is Draghi Risking Everything To Teach Rome A Lesson, from Tyler Durden

Posted on June 7, 2018 | Leave a comment

One of the more consequential dramas on the world stage in what happens between Italy’s new government and the ECB and EU. It’s like Greece a few years ago, but Italy is much bigger and more important within the EU. From Tyler Durden at zerohedge.com:

Perhaps the most perplexing market-moving event of the past 48 hours, was the 1-2 punch of a Tuesday Bloomberg report that next Thursday’s ECB meeting is “live” in that policy makers anticipate (at long last) holding a discussion that could conclude with a public announcement on when they intend to cease asset purchases (QE), coupled with a slew of ECB members overnight coming out with unexpectedly hawkish comments.

Of these, the ECB’s otherwise dovish Peter Praet said inflation expectations are increasingly consistent with the ECB’s aim, and added that markets are expecting an end of QE at end of 2018, this is an observation and input that is up for discussion and that “it’s  clear that next week the Governing Council will have to make this assessment, the assessment on whether the progress so far has been sufficient to warrant a gradual unwinding of our net asset purchases.”

Other ECB hawks such Hanson, Weidmann and Knot doubled down on the central bank’s sudden QE-ending jawboning pivot, saying that the ECB could lift rates before mid-2019 due to “moderately” rising inflation, that market expectation of end of QE by end of 2018 is plausible, and that the ECB should wind down QE as soon as possible.

The market response was instant, and it not only pushed both German and Italian yields sharply higher…

… as well those of US Treasurys, but spiked the EUR while sending the USD lower, and unleashing today’s euphoric stock surge.

Now, it is hardly rocket surgery that without ECB support, Italian bonds are toast. After all, as we have shown and predicted since last December, without the only marginal buyer of Italian debt for the past 2 years – the ECB – Italian yields would soar, leading to a prompt default by the nation which would suddenly find itself drowning under untenable interest expense.

To continue reading: “The ECB Is Basically Giving The Finger To Italy”: Is Draghi Risking Everything To Teach Rome A Lesson

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Record Short Bets against 10-Year Treasury Promise Turmoil, by Wolf Richter

Posted on February 13, 2018 | Leave a comment

As SLL recently observed, when everybody is on the same side of the boat in financial markets, it usually capsizes. Right now, everyone is on the short the 10-year treasury side of the boat. From Wolf Richter at wolfstreet.com:

A very crowded trade goes begging for a contrarian reaction.

The 10-year Treasury yield closed on Monday at 2.86% the highest since January 16, 2014, after briefly kissing 2.89% during the day. At the moment, it is holding at 2.85%. Bond prices fall when yields rise – and being short the 10-year Treasury, and thus betting on a rising yield, has become a very crowded and profitable trade for hedge funds and other speculators.

Short bets in 10-year Treasury futures rose to 939,351 contracts, the most ever, according to Commodity Futures Trading Commission data through February 6, cited by Bloomberg yesterday.

This record came even after the market turmoil on February 5, when the Dow plunged 4.6% and when, briefly, Treasuries soared, with the 10-year yield dropping 13 basis points, which would have made shorts very nervous. But apparently, they hung on, as their record short positions through February 6 shows, when the 10-year yield rose again and closed at 2.79%.

The next step is 3%. The last time the 10-year yield was 3% was in early January 2014, and then only for a few days at the end of a brief spike. In May 2013, it got close, but no cigar (2.98%). And before then, it was at 3% in July 2011.

That 3% is a key level for another reason. At around 3%, the 10-year becomes very alluring for long-term holders, given today’s dividend yields and other yields, and it will bring out more buyers.

The emergence of these additional buyers may coincide with short-sellers trying to take profits, which may conspire to pump up the price and push down the yield. And this, fired up by speculators trying to get out of a short position, would turn into a sharp snap-back rally for the 10-year Treasury, and a sharp drop in yields. This could take off even before the 10-year yield hits 3%, and it could catch some speculators by surprise.

To continue reading: Record Short Bets against 10-Year Treasury Promise Turmoil

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