THE OUTLOOK FOR U.S. BOND YIELDS / MACLEOD FINANCE

The outlook for US bond yields

One of my Substack followers has requested an update on why the yield on the 10-year US Treasury rose earlier this week when virtually everyone expects the Fed to reduce its funds rate...

ALASDAIR MACLEOD

The rise in this bond’s yield has been notable in the last two weeks. 

Other than pointing out that the yield curve is sharply negative, and that 10-year yields can rise even if there is a 25 basis point cut in the Funds Rate, looking beyond short term uncertainties bond yields will rise for the following reasons:

·      The Fed sees the carry trade as a source of US Treasury funding, because hedge funds and others are borrowing in yen, selling yen to buy dollars to buy T-bills. 

Accordingly, they will not want to discourage this trade by lowering the funds rate.

·      Inflation is not dead. 

It is the result of two factors: the USG’s large budget deficit driving non-productive inflationary spending, and foreigners withdrawing from the US Treasury market. 

The Fed will be acutely sensitive to these factors.

·      The oil price, admittedly volatile, is rising and the chart looks increasingly bullish. 

The consequences for consumer prices cannot be ignored.

·      Most importantly, foreigners are getting out of dollars and into gold as well as other commodities. 

In other words, the credit available for buying into the necessary quantities of US Treasuries of more than a few years’ maturity is simply not there without QE being reintroduced.

In not much time, it should become apparent to increasing numbers of currently complacent investors that the US Government is in an inescapable debt trap. 

It always starts with foreigners (holding about a third of the debt in this case) taking fright. 

This is followed by domestic US institutions beginning to realise why the debt is being sold.

The latter are likely to think that higher interest rates will stop the run on the dollar, in this case into gold. 

Indeed, ask any investment professional what happens to the gold price when bond yields rise, and they will say gold goes down. 

This is Keynesian rubbish, born out of the last decades of thought and price control over markets in fiat currency conditions. 

That is not the developing situation. 

At the least, we are back to gold being recognised as money and dollars as credit by most of the world’s population. 

And interest rates are reflection of increased risk to fiat currency values, rather than a tool of currency value management under the control of central banks. 

My last chart shows how these conditions, which we saw in the 1970s, will play out.

The correlation is clear. 

Higher interest rates are the product of the loss of a fiat currency’s purchasing power, which is best measured by its value expressed in gold. 

I expect the US debt trap to drive long bond yields to well over 10%, even 20%.

Other than short-term volatility, to those hoping for lower bond yields — dream on!