Despite US Treasury department manipulation of the yield curve last week and another Fed pause, yields still average above five in the aggregate

 We saw a much bigger surge into bonds in March, but yields persisted.

With inflation, employment, and nominal GDP all still strong, Treasury tricks are unlikely to unravel this.

Cash such as VMFXX at 4.21% ytd and total stock market such as VTSAX at 13.92% ytd continue to trounce bonds ytd. VBTLX is still down 0.39% ytd. AGG is down 3.46% ytd.

 

US Treasury yields making new highs for this cycle as of Oct 19, 2023

Massive Treasury issuance to pay for massive pandemic spending has driven yields higher.

 

It's the law of supply and demand: Increase the supply of US Treasury debt and the price goes down.

 

Previously issued securities paying lower interest rates drop in price because they are much more plentiful in comparison with the new issues paying higher rates which investors demand.

 

Who wants 'em?

 

Banks are estimated to be stuck with these dogs in quantities approaching what the Fed has let roll off, which is what they also must do. The collateral backing banks, insurance companies, pension funds, et cetera et cetera et cetera, suffers.  

The Federal Reserve Bank's role as a big buyer in the bond market has been curtailed since 2Q2022, removing its big price support role. As of 3Q2023 the balance sheet is down $768 billion as securities mature. That's about $51 billion rolling off per month, and no net buying to replace it.

 

The Fed has also raised the Federal Funds Rate to an average of 5.33 to combat inflation.

 

So yields have risen for such reasons to these records for this cycle to date, but it's all predicated on the US Treasury having to dilute the supply:

 

1MO 6.02 5/26/23 (debt ceiling disagreement)

3MO 5.63 10/6/23

6MO 5.61 8/25/23

1Y    5.49  9/27/23

 

2Y 5.19 10/17/23

3Y 5.03 10/18/23

5Y 4.95 10/19/23

7Y 5.00 10/19/23

10Y 4.98 10/19/23

 

20Y 5.30 10/19/23

30Y 5.11 10/19/23.

In the aggregate as of Oct 20 yields are up a net 22% year over year to an average of 5.25692 from 4.30846 when all the wizards of smart said they couldn't possibly go any higher without breaking something.

They're still saying that.

 

The three year and five month embarrassment of core inflation higher than the 10-year Treasury yield finally ended in August

 Yield for the 10-year US Treasury rose to an average 4.17% in August 2023 while core inflation year over year fell to 3.87% in August 2023.

This ends the 3-year 5-month run where core inflation exceeded the 10-year yield, something which has never happened in the data.

The only time core inflation outran the 10-year previously for a comparable period was in 1974 and 1975 when core inflation averaged 7.91% and 8.35% vs. the 10-year yield which averaged 7.56% and 7.99% respectively.

That lackadaisical response to inflation by the Federal Reserve under Arthur F. Burns (1970-1978) prefigured the 1980 resurgence of core inflation to 9.19%. Under his successor Paul Volcker, interest rates were hiked to unprecedented levels to curb inflation. The 10-year yield rose to an average of 13.92% in 1981 as a result.

The current fear is that the Powell Fed has set up the economy for a repeat of this awful period of inflation.

Whatever is said about it, there is no question that inflation is a benefit to the Federal government because it depends on borrowing to finance deficit spending and consequently the debt, now at an unprecedented $33 trillion. Inflation simply reduces that cost to the government over time by making the dollars previously borrowed worth less.

It is true that new borrowing costs much more, but the debt mountain mammoth in the living room is the more pressing problem. This is why the cognoscenti teach that inflation is a good thing.

Extending the duration of inflation at the currently relatively low level has been in the government's interest. The costs born by the public in the form of higher prices for goods, services, and borrowing are becoming routinized so that the voters are becoming inured to the deleterious effects for them while clueless of the benefits for the debt mongers. 

This is particularly the case for voters who have no memory of that horrible inflation which gave rise to the backlash represented by Ronald Reagan's election in 1980, and who now vastly outnumber those who still remember.

It should not be forgotten that Jimmy Carter got elected in 1976 anyway, after the Burns' inflation. The voters then took it all in stride, too, until they didn't.

Same as it ever was.

 

US Treasury yields pushed to new cycle highs last week despite another Fed interest rate pause

 Cash was about the only thing which did better week over week on Friday. Treasuries and bonds generally took a beating, as did stocks.

The UST yield curve aggregate closed up a net 1.27% week over week on 9/22, to an average of 5.0707692, the highest Friday close yet for this cycle.

Yields in the aggregate made a new high for this cycle on Thursday, for an average of 5.0915384. 

Here's the year-to-date performance for key categories using some commonly used Vanguard funds:

Treasury Market VFISX 0.66% VFITX -0.70% VUSTX -5.57%;

Investment Grade Market VFSTX 2.08% VFICX 1.32% VWESX -0.83%; 

Total Bond Market VBTLX -0.03% (+0.44% previous week);

Cash VMFXX 3.58% (3.48% previous week);

Total Stock Market VTSAX 12.95% (16.45% previous week).

 

 

Let's check in on the US Treasury yield curve and year to date performance of selected Vanguard funds

The UST yield curve aggregate closed up a net 0.68% week over week on 9/15, to an average of 5.006923, the first Friday close this cycle in the 5s.

 

As expected, fixed income isn't doing well in this rising-rate environment. Stocks have done surprisingly well this year, and even cash has beaten bonds.

 

YTD performance:

 

Treasury VFISX 0.68% VFITX -0.26% VUSTX -4.12%;

Investment Grade VFSTX 2.21% VFICX 1.73% VWESX 0.00%; 

Total Bond VBTLX 0.44%; Cash VMFXX 3.48%; Total Stock VTSAX 16.45%.

 

Other popular vehicles: 

 

$SPX 16.37%

$AGG -2.12%

$TLT -8.38%. 

 

US Treasury yields have tanked 14% since March 8 amid bank failure fears

The yield curve aggregate averaged 4.674 on March 8. Now it averages 4.017.

Bills yields fell from an average 5.09 to 4.52 in nine days, 11%, after rising 6.5% in the month 2/8 to 3/8.

Notes yields fell from 4.45 to 3.55, a whopping 20%, after rising over 12% in the month after 2/8.

Bonds yields fell from 4.00 to 3.68, 8%, after rising nearly 6% in the month after 2/8.

It's been extremely difficult to trade the volatility. $TLT is up 5.31% ytd., but $AGG is up just 1.99% ytd. It is a fool's errand to invest in bonds when they behave like stocks.

Meanwhile $SPX is up 2.42% ytd.

This is my opinion, not advice.

Here's a nice shot of recession forecast as shown by US Treasury yield curve compression, daily view, 10/26/1999 through 10/26/2022

 

The Treasury yield curve compresses narrowly into a thin thread before recessions, so it looks like one is imminent

Yield across the board right now is in the 4s except for one and two month money. The one year is the leader, roughly in the middle of the pack, around which the other rates have been organizing.

Interestingly enough, compound annual growth of nominal GDP since the year 2000 22 years ago has come in at 4.18% through 2Q on 2Q. The 30-yr tonight is yielding 4.19%. This looks like rate normalization to me because rates are compressing in that vicinity, finally commensurate with actual economic growth, after the pitiful all-time-low average annual 30-yr yield in 2020 at 1.56%. We haven't had a 4% average 30-yr yield since 2010.

Given the extraordinary interventions by the US Federal Reserve over the period to suppress interest rates, we may see them explode the other way given the length and depth of the distortions. Trillions upon trillions of US Dollar denominated debt was sold at those repressed prices. In 2020 alone we're talking about $2.9 trillion in 2-10yr Treasury notes, not counting the short end bills and the long end bonds, all yielding well under 1%. It could get really ugly.

Recession doesn't always happen right away, but the signal is pretty clear. It seemed to take forever in the late 1990s.

As always, click images to enlarge.

Recessions are in gray.

And as always, this is not investment advice.

daily view through 10/25/22

monthly view through Sep 2022

The entire US Treasury yield curve bows and worships at the feet of the 1-year Treasury for an eighth day now, and you know what that means

 When the upstart 1-year tries to compete with the long end, you in for a heap a trouble boy.

Yippee-ki-yay.

The percentage holding full-time jobs through September 2022 held above 50%, disappointing the ubiquitous advocates of a Fed interest rate pivot

 Full time as a percentage of civilian population in September was 50.3%, and for 2022 through September averaged 50.15%.

Not bad, considering.

The Fed will see little evidence in this figure that its interest rate increase policy is harming employment.

Stocks on Friday collapsed after a head fake to start the week to within 1.5% of the 52-week lows set a week ago.

Long term investment grade bonds and US Treasury securities also revisited lows from 9/27/22, coming within pennies of those benchmarks.

30-year yield for UST is back up to 3.86%. It was 3.87% on 9/27. At the beginning of 2022, yield was a paltry 2.01% by comparison.

UK gilts are experiencing the same action despite the Bank of England intervening to buy bonds. 

The bond crisis is not over.

With yields soaring across the board no one wants to own the lower paying outstanding issues, which are legion, destroying their value.

But everything in the global economy is based on those, piled up in earnest after The Great Financial Crisis of 2008, and in orgiastic frenzy afterwards during the late pandemic.

Bond yields in 2022 are telling you that they are overvalued by 92%.

Stock market valuation is telling you a similar thing.

From 1938 through 2019 the median ratio of the S&P 500 to GDP is 81. In 2020 we averaged 154, or 90% overvalued.

This is the major deflationary headwind facing the world, the other side of the COVID-19 inflationary shock coin.

Push here, it comes out over there.

Modern central banking cannot escape this conundrum any more than the gold standard could.

The only thing the individual can do in this situation is to owe nothing and save everything, preferably in your hands.

Good luck.

 

 

 

 

 

 

 

 

 

 

 

 

Bond yields should fall as stocks sell off, lol

 Yield on the US 1-year is beating everything with a club in 2022, up 920% year to date.

Hide your baby seals.

30-year bond yield breaks to all time low

Story:

The 30-year bond yield tumbled 5.4 basis points to 1.917%, sliding below its previous all-time low of 1.95%. 

More:

On Friday the 30-year U.S. Treasury bond yield fell 5.2 basis points to 1.92% based on Tradeweb data to an all-time low of 1.89%.  

They round it up to 1.90% at Treasury

 

The contagion of the record low 10-year Treasury yield of July 2016 has spread to the 30-year in August 2019

U.S. 10-Year Treasury Yield Closes at Record Low:

The yield on the U.S. 10-year Treasury note settled at 1.367% Tuesday, breaching the previous close low of 1.404% set in July 2012 when investors rushed into haven debt amid the depth of the eurozone’s sovereign debt crisis. Yields fall as bond prices rise. ...

On an intraday basis, the U.S. 10-year yield touched as low as 1.357%. It was 1.446% Friday and 2.273% at the end of last year. The U.S. bond market was shut Monday for a holiday.

Traders say the 10-year yield still has room to fall. Investors and analysts say bond yields are in uncharted waters now and that it is hard to predict how low yields could go in this environment.

Few in the financial markets have foreseen a period of negative interest rates touching off globally. The total of sovereign debt with negative yields jumped to $11.7 trillion as of June 27, up $1.3 trillion from the end of May, according to Fitch Ratings.

The pool is likely to expand further in the months ahead due to ongoing purchases of government bonds by the European Central Bank and the Bank of Japan. ...

The 30-year Treasury bond has been the market darling, and the buying spree has pushed down its yield to record lows lately. The 30-year bond’s yield settled at 2.138%, falling below its record close low of 2.226% Friday.

The 30-year bond was usually the playground for pension funds and insurance firms. But it is now being bid up by a broader investor base due to the global hunger for income. Analysts say it wouldn’t surprise them if the 30-year yield falls below the 2% mark in the weeks ahead.

Three years later:

U.S. 30-year bond yields hit record low, curve inversion grows:

In late Wednesday trading, the yields on 30-year government bonds were 1.939%, down 2.2 basis points from late Tuesday. They hit an all-time low of 1.905% earlier Wednesday.

Jeffrey Snider explains the decline in bond yields to The Wall Street Journal's Andy Kessler, tells a clueless Fed what must be done

The Fed Can’t See Its Own Shadow 

Its asset purchases are squeezing nonbank lending and sinking long-term bond rates. ...

Shortages of long bonds—good collateral—are causing “relentless” demand and therefore lower yields. That’s why German long bonds have negative interest rates: not because losing money is a great investment, but because negative interest is the cost of doing business to get “pristine collateral” to use in repos.

This is how the global credit system—what Mr. Snider labels the Eurodollar market—now works. The Fed has become the lender of last resort for the global market, including banks and shadow banks. It’s about time its governors figure that out.

So what should they do? Encourage the Treasury to issue more of the long bonds the market is demanding: 30- or even 100-year. Feed the beast. Then stop quantitative easing: It doesn’t work and soaks up collateral. Next, stop paying interest on reserves. Maybe even create a nontradable “Treasury-R” to act as reserve currency elsewhere, freeing up more bonds. If history repeats, there are about 90 days until China repos roll over again.

Notice how five of the seven 30-year bond yield dives are a feature of the recent period since the 2000 bubble

And notice how all the episodes of great stress are post-1986 tax reform.

The chickens . . . are coming home . . . to roost!

Treasury bonds are the most expensive they have been in over sixty years

All "asset" classes are near-record expensive: bonds, stocks, gold, housing, college education, health insurance policies . . .. 

Cliff Asness, here:

So, the bottom line is, as measured by real bond yield, U.S. Treasury bonds are really frickin’ expensive. Measured by the slope of the yield curve they are really frickin’ expensive. But, measured by the average of these two simple variables, they are 60+ year just about record-low frickin’ expensive. This result is not caused by, but is certainly exacerbated by, the (perhaps) surprisingly uncorrelated nature of slope and real bond yield, thus making both so low and at the same time considerably more surprising.

Despite alarmist headlines, Italy knows it can play chicken with the Euro cheaters up north and win because Super Mario will do "whatever it takes"

That's the lesson of Greece and Italy knows it. If there is no way the EU would let Greece go, there is no way Italy or Spain or Portugal are going to be let go, either.

Meanwhile, enjoy these alarmist headlines from a gold fundamentalist.

Italy Bond Yields Surge In Confrontation with ECB President Mario Draghi:

In theory, German, Italian, and Greek 10-year bonds should all have the same yield. In practice, they clearly don't. The difference is perceived default risk. The odds of Italy leaving the Eurozone are rising.

"One Size Fits Germany" Math Impossibility, Get Your Money Out of Italy Now!:

[I]nterest rates are on the verge of spiraling out of control in Italy. ... In theory, German, Italian, and Greek 10-year bonds should all have the same yield. In practice, they clearly don't. The spread between German 10-year and Italian 10-year bonds is 330 basis points (3.3 percentage points). The difference is perceived default risk. The odds of Italy leaving the Eurozone are rising. On September 28, Italy's proposed budget deficit of 2.4% sent bond yields soaring. And they haven't stopped.

The yield on the 10-year has been a lot higher for a long period of time than it is right now.

Everyone should relax and enjoy the show. Who knows, maybe this will force the other rule breakers to clean up their act a little bit, at least for a little while.

Remembering when Mario Draghi really, truly got it (sort of)

"Five years ago today, Mario Draghi saved the euro", by Eshe Nelson, July 26, 2017:

But with a simple, seemingly off-the-cuff phrase, Draghi fundamentally changed the course of events: “whatever it takes.”

At a speech in London on July 26, 2012, the ECB president gave an account of the euro-zone economy. Bond yields of weak euro-member governments were soaring, and traders doubted that national, euro- or EU-level institutions could get their act together in time to avert disaster. Draghi sought to convince international investors that the region’s economy wasn’t as bad as it seemed. He then made the momentous remark:

“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” ... the promise was enough to calm investors and bring down bond yields across the euro zone.

Italian bond yields at auction yesterday were way up but still well below 2011 "crisis" levels

Yield on the US 10-year has fallen 29% since last December but the S&P500 is up 11% year over year

It's a little odd.

Falling yields have been associated with big stock market pull backs in the recent past, but not this year . . . so far.

Between December 2007 and December 2008, the 10-year Treasury yield fell over 40% while the S&P500 tanked 37% in calendar 2008. Similarly in calendar 2011 the S&P500 barely eeked out a total return of 2% as the 10-year yield also fell 40%.

Conversely, rising yields have been associated with healthy stock market gains. In 2013 yield on the 10-year rose almost 69% as the S&P500 posted a phenomenal total return in excess of 32%, the fourth best return since 1970. Similarly yield rose 50% between late 2008 and late 2009 as the S&P500 recovered 26% in 2009.

Steady yields in 2006, 2007, 2010 and 2012 relative to the prior year are associated with S&P500 gains of between 5.5% and 16%. That 5.5% year in 2007 is associated with a yield drop of 10%.

The current yield of 2.07% would need to fall another .33 to represent a 40% drop in yield year over year associated with the big stock market pull backs of the recent past which everyone seems to have been waiting for but not getting.