The upward lurch higher in the cost of capital continues. The US 10 yr yield today broke above its 2015 closing high and sits near a level last seen in September 2014 near the round number of 2.50%. The US 5 yr yield is at the highest level since May 2011 near 1.90%. Let’s blame the $2+ move higher in crude oil this morning (and up almost 50% y/o/y). Crude oil settled lower later in the day and yields pulled back a bit. But look at JGB’s in Japan, the 40 yr yield spiked by 12 bps to .95%, a 15% one day jump. What about ‘yield curve control’ ? The 10 yr JGB yield was higher by 3 bps to .09%. It’s still pretty close to zero of course but keeps moving away from it. Yields in France and Germany are at 11 month highs. Yes, Trump’s victory added fuel to this global rise in rates but I’ll list again the various reasons for the move higher in yields over the past 3-4 months even before the Presidential election. I’ll also reiterate my bearishness on bonds.
- In a bond world dominated by central banks, damaged bank profitability in Japan and Europe marked the end of negative interest rate policy in terms of going deeper down that rat hole.
- The BoJ started buying less long term bonds and now the ECB is slowing the monthly flow of buying.
- Starving pension funds, savers and insurance companies of yield has garnered fodder for political pushback against central bankers, especially from politicians in Europe, including the UK.
- Mark Carney and Janet Yellen have admitted that they’re willing to tolerate higher inflation at the same time inflation expectations are rising.
- The commodity bear market is over as a year of massive supply cuts is finally filtering through. The Journal of Commerce index of industrial materials is at the highest level since June 2015 and is up 29% y/o/y.
- The Atlanta Fed wage tracker as of October was at 3.9%, the highest in 8 years.
- Foreigners remain aggressive sellers of US notes and bonds, $310b over the past 12 months.
- And now let’s add Trumpnomics which is fiscal kerosene on top of an economy that is arguably at or close to full employment in the context of our current participation rate.
This all begs the question on whether the FOMC this week will acknowledge that the world has changed? I wonder if they read the House fiscal plan which may get implemented and all the stimulus it will provide. They left the November 2nd FOMC meeting with the implied inflation rate in the 10 yr TIP at 1.71% vs 2.01% today. The Journal of Commerce index is up 10% since then.
I’ll talk more tomorrow about the Fed and the massive size of US and global debt that this rise in interest rates is happening with. Last week’s flow of funds statement from the Fed listed total US non financial debt at $47T. Adding total financial debt puts another $15.6T on that total.
China was messy overnight as their 10 yr yield spiked by 23 bps to 3.23%. The Shanghai comp got banged for a 2.5% decline and the Shenzhen index fell by almost 5%. The Shanghai property stock index fell by 3.5% and the H share index in Hong Kong fell by 1.7%. Tighter liquidity is clear and now we have another spat between China and Mr. Trump. Picking a fight with the 2nd largest economy in the world is not a good idea.