tag:blogger.com,1999:blog-5908830827135060852.post2791247474600480011..comments2024-03-01T02:40:14.946-05:00Comments on Bond Economics: Will Treasury Yields Ever Escape The Low Yield Trap?Brian Romanchukhttp://www.blogger.com/profile/02699198289421951151noreply@blogger.comBlogger9125tag:blogger.com,1999:blog-5908830827135060852.post-6391258891705072202016-10-14T12:46:57.710-04:002016-10-14T12:46:57.710-04:00Your Ten Year Yield graph carries a message but wh...Your Ten Year Yield graph carries a message but what is that message?<br /><br />Here is a basic fact that can help us focus: A government that wants to spend more than it receives in taxes must either borrow from itself or from the private sector.<br /><br />Now if government borrows from itself, it can borrow for interest payment as easily as for money it intends to trade for goods and services. The interest rate simply does not matter in this case.<br /><br />On the other hand, if government borrows from the private sector, government is asking the private sector to not spend. Instead, government wants to spend money the private sector has already earned. Interest payments act to encourage delayed spending by the private sector.<br /><br />With this background, we can begin to grasp the message contained in your chart. Over a 36 year period, government has paid less and less for the privilege of borrowing from the private sector. The current interest rate is near zero which which provides the private sector little incentive to delay spending. <br /><br />We nearly have enough background to begin to focusing on the fundamental question you raise: Will interest rates go up in the future? <br /><br />We observe this important current macroeconomic condition: Government <i> <b> continues to desire </b></i> to spend more than it receives in taxes. As a result, government must continue to either borrow from itself or the private sector. This condition alone would drive up interest rates if the money supply base was fixed. <br /><br />The record (your chart) shows that over 36 years, interest rates have gone DOWN, not up. For me, this is conclusive evidence that government has been borrowing from itself (for 36 years), intentionally driving down interest rates by increasing the money supply. Government has now successfully driven interest rates to near zero.<br /><br />If government policy over 36 years has driven down interest rates to zero, why and what would cause government to now raise interest rates? Hmmmm. A paradigm change may be required.<br /><br /><br /><br /><br /><br /><br /><br />Roger Sparkshttps://www.blogger.com/profile/01734503500078064208noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-53587437722492954942016-10-13T12:19:53.391-04:002016-10-13T12:19:53.391-04:00Thanks.
I have been too busy on other things to h...Thanks.<br /><br />I have been too busy on other things to have a useful opinion on oil. If global growth remains reasonable, I would expect oil prices to remain perky (at least until fracking becomes economically viable again).<br /><br />The effect on inflation is straightforward. There is a large direct impact on headline CPI, (although what matters are gasoline prices, not crude), to the extent that inflation-linked markets in the short-term are a proxy play on oil. However, once the short-term effects on headline wash out, there is very little impact on core inflation. Core inflation is driven heavily by wage trends, and things like foreign import prices and rents. The days of unions getting wage increases because headline inflation went up are long gone.Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-11575283670380994562016-10-13T10:15:43.569-04:002016-10-13T10:15:43.569-04:00Brian,
Do you have any view on the turn around in...Brian,<br /><br />Do you have any view on the turn around in the oil price and what it means for the medium term outlook for inflation and interest rates?<br /><br />BTW, your blog is always a high quality read.<br /><br />HenryAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-4239594311635871042016-10-13T07:03:01.693-04:002016-10-13T07:03:01.693-04:00I am a prairie populist, and I do not fit into the...I am a prairie populist, and I do not fit into the traditional left/right spectra of other countries. So I am used to being a detached political observer. I would agree that the consensus view governing elites in the developed countries is out of touch wih reality, and hence creates opportunities for political turnover. However, the only thing they are good at it is hanging on to power. Therefore, even though change is inevitable, timelines are very uncertain.<br /><br />The Trump campaign highlights the situation. Even if he loses, he will do a lot better than his track record woukd have suggested was possible. Although you can say a candidate like him is inevitable, forecasting which election he shows up in is hard to do.Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-42061894853182632532016-10-13T06:47:17.481-04:002016-10-13T06:47:17.481-04:00If you know that *everyone* is going to buy at 5%,...If you know that *everyone* is going to buy at 5%, you want to get in ahead of them (at 4%, say). And *everyone* knows that. The JGB market shows how that logic works in practice.Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-29260741449798472672016-10-13T03:31:04.310-04:002016-10-13T03:31:04.310-04:00The current state of things is politically unsusta...The current state of things is politically unsustanable. I would say we cannot carry on this way much longer. The great divergence in wealth distribution cannot live long together with democracy. I too lack of imagination to say what is going to happen but certainly something is cooking up. <br /><br />Major international crises or great political shift (read socialism of some type) might very well totally change the picture.Jussinoreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-32512676222504163002016-10-12T22:36:56.815-04:002016-10-12T22:36:56.815-04:00"A selloff is not going to take the 10-year t..."A selloff is not going to take the 10-year to 6% in six months; that's a fantasy scenario similar to JGB scare stories."<br /><br />It was you that was musing about 6%. :-)<br /><br />And if you are correct about the 4% hurdle then there may be no significant buying until the yield gets back to 5-6%<br /><br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-17062082572577919952016-10-12T21:42:03.236-04:002016-10-12T21:42:03.236-04:00To start with my personal positions, I am a recove...To start with my personal positions, I am a recovering secular bond bull. I have a boring passive portfolio, with a bond allocation. If there is a sell off, c'est la vie. It would create interest in bonds once again, which would presumably help my reader base. <br /><br />A selloff is not going to take the 10-year to 6% in six months; that's a fantasy scenario similar to JGB scare stories. I am writing about a secular bear market. It would take at least a few years to reach such a level, in the form of short sell-offs punctuated by range trading. The Fed is not going to hike fast enough to ratify a faster-moving selloff.<br /><br />Sure, there are market losses for institutional investors. However, their actuarial liabilities are generally longer duration than their assets, and so they will actually improve their funding status. Pension funds are getting killed on the liability side over the past couple of decades, even with the bond bull market. Since no one is celebrating the bond bull market, why is the bear market going to be different?<br /><br />Worrying about the solvency of the Fed has to be the least of my worries. The Fed is going to run out of money (which it has the power to costlessly create)?<br /><br />Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-43711874059323344462016-10-12T19:24:34.203-04:002016-10-12T19:24:34.203-04:00Personally, I think there is a little too much bra...Personally, I think there is a little too much bravado in you blog.<br /><br />May be you are short bonds, well, at least not long?<br /><br />Anyway, a 0% to 6% move surely would blow the roof off?<br /><br />The question who is holding bonds? <br /><br />Is this one of the asset classes that the Fed has been buying as part of its QE programme? <br /><br />Someone has to get burned if the markets bust.<br /><br /><br />HenryAnonymousnoreply@blogger.com