Prolonged Periods of Bear Steepening Threaten Financial Stability
Everyday there is a new reason to sell bonds--such an evolving narrative--the latest one seems to be really strange--the breakdown in correlation between bonds and equities, like this is a new thing. The other one is the oil price, but actually breaks are not really going up with oil. Then you can add on the dearth of buyers against supply, but households are actually stepping up. The big question still is whether the Fed is done, as there is no great history to argue for end of the Fed cycle and higher bond yields. I do get the knee-jerk steepening arguement MacroAlf makes--if Fed is thought to be done or close to done, the thing depressing term premium--further hikes--is less of a factor. At this level of 10-year I remain skeptical that there is much upside left, but ignore me, as I have said that for 3 months.
You've probably noticed that while the Chinese have been dumping U.S. Treasuries, they have been buying U.S. mortgage-backed securities (agencies) instead, in order to receive higher yields. However, since the Chinese real estate market has been crashing, look what individual Chinese investors have been buying instead. Haven't seen this receive much press. https://www.scmp.com/business/article/3229769/chinese-buyers-return-us-property-market-time-they-want-home-not-investment
Sooner or later, the market has to react to fiscal policy that is unsustainable. Maybe we are at the point where the market is saturated with government debt.
Any chance this is a signal for stagflation?
😂 thanks for the laugh about the ‘pineapple pizza’
Really great and helpful post
Thanks for getting into the weeds on “bear steepening”. I’ve actually been wondering about this topic lately so this was helpful 👍
Fantastic post as always Alfonso. Grazie!
I too wonder; if, in our desire to make economic and financial market analysis a science, we're at risk of losing sight of our understanding that what we're actually participants in is a form of art. Such a recognition might allow us to retain our appreciation of the subtlety that may be helpful to our avoiding a more dogmatic approach that risks the removal from our grasp the humility helpful to our need to continually recalibrate our opinions as we process the continual flow of new data.
We're told that an inverted yield curve predestines us to experience economic recession but also that interest rates are the arbitrator of the supply and demand for money with higher interest rates, unlike most of our GFC history, possibly indicating the possibility of increased demand for money to invest in the real economy. Certainly not a bad thing.
We're told that the "belly" of the yield curve inhabited by ten-year treasury rates with yields at sub 4% were at those rates only due to some of the lowest term premia in history. One might think that a restoration to more "normal" term premia might not be a bad thing.
Finally, yes, it's true that nominal GDP rates have declined by notable amounts, but "real" GDP rates much less so due to what are declining inflation rates which here are described as remaining "much higher". Well, one can argue that point, but certainly we're much closer to the Fed's stated 2% target than we are distant from it.
I'm wondering if RFR curves are a better measure. There is a now credit element to a US treasury note, particularly with debt ceiling and shut-down politization, which may drive some of that steepening.