TREASURY YIELDS NOW HIGHER THAN BEFORE JACKSON HOLE
15 November 2010 by Cullen Roche
25 Comments
If the Fed is truly intending to manipulate the yield curve they are failing spectacularly. Ultimately, this is the primary goal of QE – to reduce rates and ease monetary conditions so that business investment and borrowing becomes more attractive. With QE2 officially starting today, however, bond yields are higher across the curve than they were when Ben Bernanke gave his Jackson Hole speech. This is exactly what we saw during QE1, QE in Japan and QE in the UK. In none of these cases did business borrowing pick-up substantially. Higher interest rates are certainly not helping the cause here. This is just one more sign that QE will do nothing to help the real economy:
exactly; Bennie is being overwhelmed by foreign response;
he’s a bit out of touch on the power of the FED;
if he’s expecting to be able to bid up QEII quantity by multiples – he’ll probably be surprised again & again, right up to the point where US citizens are finally out for blood
We’ve seen this movie before. The CB can’t keep long rates down via QE and the Fed is unwilling to move out past the 7 year mark. But even the 5 year is surging in recent weeks as they essentially call Ben’s bluff.
This has been the $600 trillion flaw in your argument so far. Yields did in fact fall due to QE, but it looks like the bond market is no recovering. They are clearly not convinced that BB can keep rates low. If this trend continues it would be a devastating blow to the fed.
Rising yields is the last thing the Fed wants to see. Bernanke essentially put a big gun on the table and the market is claiming that it’s not loaded. Which it is not….
TPC: if the FED wants inflation higher, isn’t this simply what the higher yields are reflecting? Low levels = deflationary; higher levels = inflationary. The market seems to be saying CPI on the rise.
Also what happens if yields go up much more from here? Seems like a pattern is forming.
TPC – Are wages rising? Are there more jobs? Is end demand stronger? I don’t see any evidence of this. All I see is much higher input costs. The bond market is reflecting the fact that QE just doesn’t influence yields all that much. Yields fell on the news of QE and are now correcting from what was essentially over overreaction. The same thing is occurring in the USD.
Something seems very wrong with the bond markets right now…is this the catalyst for an equities decline, finally?
Surging treasury yields, munis collapsing, junk and high gread corporate breaking down and yet, all the while, TIPs are starting to break down in a big way and equities keep rallying?
Seriously, what is going on here?
I wouldn’t be surprised if some brokerage house takes all these things and argues that this all cataclysm for equities to move higher. I’m looking at you Citigroup.
more people in high places finally wetting their pants; if the mkt doesn’t go up in a big way now, it’ll go down?
the only question is how long it takes sentiment to spread through the rumor mill
with the original Japan QE it took ~6 months for reality to fully catch on? you have to expect faster dynamics this time around
This is exactly what happened in Japan. Equities rose, yields dropped and then both reversed after a few weeks. Does history repeat? TPC has been dead right about the dollar and bond market, but equities appear disconnected so far.
Yields did not continue to rise in JPY – in concert with overall disinflation they continued to fall, which is why they stand at 1% today on the 10 yr…
My fear is that the market, like it has been doing with commodities, is taking the illogical policy of QE to its most illogical extreme – selling the entire curve in an attempt to see how far Bernanke will go w/ this QE regime…they’ve been doing the same in commodites, now rates?
Here’s some perspective on what happened in JGB’s.
Prag cap. If Bernanke agrees with you that his policies are deflationary, and things they will also induce investors to invest in developing world countries where they anticipate higher GDP growth and interest rates, then QE2′s goal is the devalue the real value of the dollar compared to the RMB and ohter pegged currencies. Which would help the US economy grow and deleverage by shrinking its trade deficit.
BB does not agree that it is deflationary. We simply agree that it isn’t inherently inflationary (adding new money to the system). He thinks he can talk some inflation into the market while also lowering yields and enticing borrowers and investors. With yields now surging and no change in the money supply it’s difficult to understand why the dollar has been dinged as much as it has. I’ve been betting that the dollar would reverse and thus far that looks true. The disconnect in commodities and equities remains, however…..
You have to be (and I know you already are) very bullish the dollar here with the surge in yields…
This will be a disaster for the commodity complex if rising rates continue to fuel capital flows back into the USD…
I’m surprised stocks aren’t getting slammed today. Retail sales were in-line, empire state data was a disaster, yields are rising, US dollar rising, Euro falling. That would generally result in lower stocks, but we’re very resilient. Greed, resilience, euphoria, irrational? Take your pick.
Could it be that this theatre that some call a free market is being propped up for the GM IPO scheduled to take place in a few days?
So much for being propped up. Equities are tanking in the last 30 minutes.
Cullen,
Wonder if you (or anyone else) have any thoughts about going long the long bond soon, perhaps via TLT. I’m sorta in the Gary Shiller/David Rosenberg camps that it could rally to a 3% yield eventually. As you know, economic fundamentals are not great and the present euphoria should eventually wear off once ppl realize QE2 does nothing to help create jobs. The currently rising yields might provide a good entry point?
Scott
TPC – Yields are rightfully correcting back to their pre-QE2 announcement range. This is a non-event. Much ink has been spilt over this ineffective and inconsequential policy. Markets are only just beginning to realize that it does little to nothing.
I’m really confused now. What does QE do if it can’t even reduce rates? All this chatter in recent months for what?
THE QE2 Bond Buying essentially starts in December for approx 3months.
It is premature to evaluate this method for “Economic Stimulus” based on the stated intent.
so-TPC–we are not there yet.
BTW–Banzai Ben was carefull to point out where he will be doing the backstroke
on the Yield Curve–
“His Intent” was to see the 30yr go vertical–forcing money out.
I think he is getting that done.
“His Intent” was to see the 30yr go vertical–forcing money out.
So the yield goes vertical and money is forced out of the long bond.
You mean the money flees the long bond and they are just left in a pile and no one owns them any more???
Your statement makes no sense. A bond can only be sold if there is a buyer.
Try again!
TPC – Exactly old timer. All bonds are held by someone in equilibrium. I have no idea why people keep saying that money will flow from bonds to stocks….That’s just not how it works….
The Treasury market is liquid there are always buyers– at a price
Just last week investors bought tips with 0 to negative yield– that’s the definition of liquid.
The purpose of a more vertical yield curve is to force the tradeoff between investment choices
Would you hold the 30yr with it’s price going down?
Of course that does depend on several factors–but in general most folks want the coupon plus price appreciation over time.
My gut tells me the FED would rather have investors spending on goods and services in anticipation of Inflation rather than letting money sit in ltbonds
So what is your asset recommendation if you are short stocks are you only long cash, how has the dollar performed since the Jackson Hole.
TPC,
Well you show the JGB’s and the deflationary period. So if our yield curve moves above that, should we then expect inflation?
I believe what we are seeing here is some capital flows from the bond market into equities/other markes.
Look, I’ve said it here repeatedly, the bond to equities ratio is 10/1. Just a small move from the bond markets into something else could be a huge shift.
After all, that capital has to go somewhere, doesn’t it…
“After all, that capital has to go somewhere, doesn’t it…”
No, in fact, it cannot. The 10 in the figure which you cite above all has to be held by someone. If the 10 sells, somebody else has to hold them, thus buy them. Capital cannot move from one market to another. The value of that capital can change, but if I sell 10 million of bonds, somebody has to sell something else and pay me the exact same amount I get for the bonds. They have to give me 10 million.
Nor would I have to buy risky assets, and if I did, someone else has to sell their risky assets. So, capital cannot flow from one market to another.
What can happen is that people can decide stocks are worth more (and bid them up) and feel bonds are worth less (and bid them down)or vice versa. Or both can go up or down at the same time.
What you are positing is just a variation of the “cash on the sidelines” myth.