Many Mish readers have been asking about US treasury yields.
Are yields going up or down?
My fearless forecast is yes, yes, and yes. A series of charts will explain.
US Treasury Yield Curve Chart #1
Since mid-2015, yields on 1-year, 2-year, 3-year and 5-year treasuries has risen. Yields on 10-year and 30-year treasuries have fallen.
US Treasury Yield Curve Chart #2
Since December 2016, the yield on 1-year treasuries has risen. The yield on all longer-dated treasuries has fallen.
US Treasury Yield Curve Chart #3
Since July 2016, the entire yield curve, including shorter-term durations not shown, has been rising.
Since the beginning of 2014, 30-year and 10-year yields have fallen. The rest of the yield curve has risen.
Clearly, yields are headed up, down and sideways. The direction depends on duration and timeframe.
At the shorter end, five-year and less, yields have been rising since January 2014. In the same timeframe, yields on 10-year and 30-year treasuries have fallen.
Overall, we have had a bearish flattening of the yield curve since 2014.
Where To From Here?
The above charts show what has happened. But that is all water over the dam. Where we are headed is far more important.
If you think the economy is weakening (and I do), then long-dated treasuries will rally (yields fall) regardless of what short-dated treasuries (dependent on Fed hikes) will do.
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Mike “Mish” Shedlock
So when does this hit Wall Street upside the head? Or does the yield curve have to invert?
So you are essentially saying that the Fed hikes will have no effect whatsoever (except short term “noise”) on the 10 year and more interest rates?
I looks like “the smart money” is going long Or is the Fed (and or the PPT) doing the “Twist” again?
Aaron Layman Properties said:
Nice charts. Interesting to see the Fed hike rates and watch longer-dated yields fall. One could get the impression that the economy and job market aren’t nearly as healthy as the Fed suggests. What a shock!
long term yields will spike, as the market overpowers the FED even if they cut…….faith in debt will evaporate as many sovereign defaults hit and the dollar looks at 160 before its the US turn.
debt will no longer be money.
Stuki Moi said:
But man, will the Junta double down on squeezing blood out of their captive peons, before their ultimate capitulation. Anyone who consider current day Caracas a bit of a dump, is surely in for a rude awakening. Unless they wake the heck up, and throw of their shackles while there still is at least basic food and ammo supplies available.
john clark said:
Time for Fed to cut rates!
excellent work. I actually learned something.
The fed wants to be relevant so they will hike incrementally until the charts show the economy slowing, then they will ease incrementally hoping to stimulate growth. All the while they will be having all the effect of the guy doing a rain dance and then thinking he made it rain.
Stuki Moi said:
The further the Fed keeps rates from their natural equilibrium, which in uncertain times like now is rather high, since high rates is how economies rid themselves of the unsustainables that causes the uncertainty in the first place, the more “relevant” they are.
Artificially low rates is not “stimulating” in any global sense, since no new capital is being made available. All low rates do, is transfer wealth from people in productive ventures, to people with maximally easy access to “finance” (Banksters, governments with “risk free debts”, favored sectors of the idle leeches like “real estate,” intracompany from engineers and production workers to executives, lawyers and others primarily involved in financial contracts and valuations… And the rest of the modern day rackets by which the connected prey on the productive.)
Those transfers can give the illusion of “stimulating investment”, since A) People will always be more willing to take risks with other peoples earnings. And B), the protected, idle wealthy, have fewer immediate needs for the money, so a larger share of their wealth and incomes are spent on “investments.” If you rob enough guys in breadlilnes of their bread money and hand the loot to Warren Buffet, you’ll see an increased demand for the stuff he spends most of his dosh on; stocks and bonds.
That may be normally true but old models based on normal historical economies don’t fully apply in a fiat world economy of artificially set currencies rates and governments who print money to accomodate circumstances. The banks are playing a complicated dance to maintain the status quo with governments fully complicit help as needed. I see no natural end other than anarchy from worldwide debt reset as one system after another eventually defaults. I believe the collapse of the euro will be the final pin to drop.
Stuki Moi said:
So…, does that mean I get to congratulate you for coming around to anarchism?
Medex Man said:
Historically, a slowdown in the US economy meant longer duration bonds would rally / get lower yields. But historically, they weren’t starting from artificially low levels. And historically, there was a clear path to restoring economic growth, even if there was a near term recession.
We’ve been in either a recession or stagnation now for ten long years (yes, things started coming apart in early 2007… Bear Stearns “hedge” funds, etc). The Fed dropped rates to zero and kept them low for an entire decade, with nothing to show for their efforts but a stagnant economy.
Keeping interest rates too low for longer is going to hurt retirees badly. At the same time, lower interest rates will not spur new investment (only an idiot increases investment when the economy is slowing and there is too much debt).
After 10yrs of failed policy, and Trump seemingly wasting all his political capital on a bad health plan that the country can’t afford to keep… I have to ask why Mish thinks lower interest rates are going to help anything.
If GDP (or however you want to measure the economy) doesn’t return to historical growth rates that are above the increase in cost of living… it means the tax base is getting eroded. If the tax base is getting eroded, it means the “risk free” status of US Treasuries is also getting eroded.
If interest rates are pushed back down as Mish suggests, it means the credit worthiness of US Treasuries will be even further questioned by creditor countries. It means the Fed will become the only buyer of the certificates of confiscation.
I get it that traditionally a slowing economy meant lower interest rates, but this was not the case in the 1970s when many people, at home and abroad, started to question the US government’s ability and willingness to pay its debts. real interest rates went down, but credit risk went up.
When Washington DC is being run by clowns, and both political parties are in complete disarray — interest rates on government debt should be going higher. Not because the economy is booming (it obviously is not), but because the US government’s tax base (aka revenue source) is in jeopardy.
We need more economic growth, not more debt.
Jon Sellers said:
The federal government does not collect taxes in order to have money to spend. The federal government always spends the money first. It absorbs the money it spent into the economy back by collecting taxes and issuing treasuries. When the federal government makes principal and interest payments on treasuries, it simply prints the money to pay it. That’s why treasuries are “risk free”. You cannot lose on a nominal basis.
And this is also why the federal government doesn’t actually have debt in the since that you or I have debt. My debt requires me to forego other expenditures and trade valuable assets in order to pay down my debt. The federal government never has to do that. It just conjures money out of thin air.
That’s also why, after decades of ever increasing budget deficits, marginal tax rates can be at the lowest levels in history and interest rates as well.
And, without QE, the Fed doesn’t make interest rates on treasuries go down. They’re low because there is nothing better on a risk/reward basis to put your money into. If there was, the money would go there instead, and rates would have to go up.
Medex Man said:
if anything you claim was true, we would all still be pledging allegiance to Egyptian Pharaohs. You are a Californian, meaning you live in a pretend world of silicone breasts and you don’t pay bills. Not someone who can make intelligent comments about money.
Jon Sellers said:
I have no need to prove this to you, or call you names, or lie about this. And you are certainly the type who will need to research it for yourself to believe it. Do it if you wish, I don’t care. But know that your comments on these issues are nonsensical from the point of view of the people who actually knows how it works.
Medex Man said:
You are a Californian deadbeat who regularly makes dumb comments on Mishtalk. Your ignorance of basic economics is staggering. But when you start with your jack in the beanstalk bullsh!t on free money and bond markets, its easy to understand why no actual bond traders want to touch MBS with mostly California collateral — freeloaders like you are too dumb to repay.
If you knew the first thing about the bond market, you would be embarrassed to admit that Bloomberg actually had to add functionality on their mortgage pages to disclose how much of each pool is based in California. Moon-pie losers like you have a reputation
Medex Man said:
My comment was put into moderation because Mish is too nice and doesn’t want you to know how ignorant of bond market basics you are
Start here – https://www.armstrongeconomics.com/uncategorized/the-solution-3/
Maximum growth and prosperity comes with maximum freedom and equal enforcement of the rule of law, both of which are under assault from career politicians and the rest of the establishment.
Deficit spending must be eliminated, along with a bunch of other things that will never occur until we eliminate the career politician. Short term-limits is the only thing we can control, by voting out every incumbent, ever election.
You may find this thought provoking – https://www.armstrongeconomics.com/uncategorized/the-solution-3/
Read Lacy hunt for the mechanism of why long end of curve will fall.
Hey, did anyone hear George Nory interview Mish last night on Coast-to-Coast radio?
Interesting. I agreed with most. Disagreed with a few points.
I wasn’t able to listen to the last half with caller questions. Hopefully I can listen on-line to the rest.
I’m not a regular listener to Coast-to-Coast but it does offer some alternative viewpoints and I tune in when I can. I think George is a good host.
Yancey Ward said:
I continue to stick to my prediction that the 10 year bond will go sub 1% at some point. Given what we have seen elsewhere the last 2 years, I think it quite likely to go sub-zero at some point.
Tony Bennett said:
My black dog concurs … wink wink
As the charts indicate, you need to pick your time frame when making predictions.
The charts also indicate the trend in rates is up, when the global growth is trending down. What you are missing, that the invisible hand is not, is we are transitioning from public (trust) to private (no trust in govt), a process where stocks replace govt bonds as the safe haven.
You may want to chew on Armstrong’s solutions for a while – https://www.armstrongeconomics.com/uncategorized/the-solution-3/.