The bond vigilantes are back!

[GoSeigen]

We've just had the biggest move in US 10-year yields in a generation or two, about 350bp, matching the famous vigilante move of 1994-95.

Thoughts?

GS

[Itsallaguess]

We've just had the biggest move in US 10-year yields in a generation or two, about 350bp, matching the famous vigilante move of 1994-95.

An interesting recent article here that suggests saddles have been dusted down due to the real prospect of sticky US inflation -

Real bond yields – both trailing and prospective – are still very low in a historical context.

In a period of stubbornly high inflation, it is not clear that the current level of real bond yields is anywhere near sufficiently restraining.

And there are troubling indications that inflation may well exhibit such “stickiness”. Sophisticated measures of ‘underlying’ inflation (such as the Cleveland Fed median and trimmed-mean measures) show stubbornly elevated inflation. Such 3-month annualised measures of the ‘inflation pulse’ are above 6.5% (above 7% in the case of the trimmed-mean measure).

That being the case it is not implausible that the Fed may well wish to engineer even higher levels of bond yields and may need to do so by taking the Fed funds rate higher than markets currently anticipate.

Those aged bond vigilantes may need to ride on again.

https://www.gsfm.com.au/2022/06/14/us-may-cpi-ride-on-again-bond-vigilantes/

Cheers,

Itsallaguess

[Gan020]

It's suprising how little coverage there has been in the press.

I see the ECB are having to hold another meeting today less than a week after their interest rate decision to decide what to do about what they see as disorderly markets.

It would be my view that central banks have to squash inflation now else the pain will be even greater later on. They are already late but that can't be changed. Either they will do what they should or they will continue to drag their feet but either way 90% of the bonds I look at are still priced too high and require further adjustment.

I think it's going to be difficult and painful and the idea that our central bankers are somehow masters of the universe and can work a path where interest rates rise, inflation falls and a recession does not take place seems incredulous to me. Remember these are the same masters of the universe who chucked years of Keynes in the bin, invented MMT and said that printing money does not cause inflation, then they said it would be transitory and even now the ECB continues to add more inflation to the pile by re-investing the interest on bonds into more bonds.

So, the central question is who is running the markets because until Christmas the Fed was. Don't fight the Fed.

Don't fight the Fed if the Fed want to push interest rates to 4%, 5% or whatever it takes.

On the other hand is the Fed in charge any longer as Italian government 10 year interest rate is 4% up from 1% at Christmas. Or maybe more subtly "don't fight the Fed" because the Fed after being very slow off the mark is now doing the right thing. But "do fight the ECB" because they aren't raising interest rates, are still printing money (reivesting interest) and basically haven't got a scooby.