ft.com/alphaville All times are London time
News
Have US bondholders gone on holiday already?
10-year Treasuries reached a high of 3.39 per cent on Monday before falling sharply.
This course wasn’t altered by a cautious warning from Moody’s that stimulus without future offsetting increases the likelihood of a US rating revision in the medium term. This follows comments to this effect last week, picked up by FT Alphaville.
Extracts from the release below (emphasis ours):
US Tax Package Is Negative for US Credit, but Positive for Economic Growth
If the tax and unemployment-benefit package agreed to on 6 December by President Obama and congressional Republican leaders becomes law, it will boost economic growth in the next two years, but adversely affect the federal government budget deficit and debt level. From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth. Unless there are offsetting measures, the package will be credit negative for the US and increase the likelihood of a negative outlook on the US government's Aaa rating during the next two years.
…
Higher economic growth should have a positive effect on government revenues and reduce payments related to unemployment. However, the magnitude of this positive effect will be considerably less than the foregone revenue and increased benefit expenditure, resulting in substantially higher budget deficits than would have otherwise been the case. The Congressional Budget Office's most recent estimate of the deficit for fiscal year 2011 was $1.1 trillion, or 7% of GDP, assuming no expiration of the tax cuts, and $665 billion (4.2%) in fiscal year 2012. These deficits would raise the ratio of government debt to GDP to 68.5% by the end of fiscal year 2012, compared with 61.6% two years earlier.
…
Thus, while higher growth and lower unemployment are clearly good for the economy, the package is negative for US government debt metrics. In addition, there is a risk that the two-year extension may be renewed at the end of 2012, given that that period coincides with a presidential election. A permanent extension of the tax cuts alone (without other measures) could result in a considerable increase in deficits and debt levels unless other measures to reduce deficits are adopted. The exhibit below illustrates that the fiscal balance in the coming decade would be considerably higher under such a scenario, all other things being equal, and this would result in a worsening of the government's debt position. A package of options put forth by the fiscal commission at the beginning of this month provides a menu of such measures that would reverse these trends, but their adoption remains uncertain.
Yup, no doubt.
But what of yields in the short-term – are we in for more rises before Christmas? And would this be good news or bad news? Or should everyone just relax?
In its weekly strategy report out Monday, JP Morgan Asset Management argues that US bonds are actually a bit of a snip, at least for now:
Bonds look oversold in the short term (see COTW), but yields appear likely to head up further over the medium term. The good news is that the rise in yields has been driven by higher real yields rather than higher break-even inflation rates. Since the 3 November FOMC meeting, when QE2 was launched, yields have risen by 71bp from 2.57% then. This has been matched by the rise in real yields, which have risen from 0.41% to 1.09%, leaving inflation break-evens at 2.16%. From distressed levels, markets have therefore repriced long-term growth prospects in the US "“ from a catastrophic to a dour outlook. The bond market is now pricing in trend real GDP growth of just of 1% p.a. in the US over the next decade "“ a level that seems too low. History suggests that the inevitable result of banking crises is lower rates of trend growth, but this writer intuitively feels that the bond market has been too harsh on US prospects (our new Capital Market Assumptions will be released shortly and will provide further details of J.P.Morgan's new long-term growth and inflation assumptions).
For your pictorial pleasure (and note the blue line grazing the Bollinger band):
We’ve previously argued that inflation fears are warranted yet exaggerated. And there’s little in the news of the last week or so that has fundamentally changed the core inflation outlook. It’s also unsurprising that some good economic news has encouraged investors to shift into riskier asset classes.
It’s worth quickly looking back at what happened to yields in the wake of QE1. From the JP Morgan paper, again:
To put this into context, the announcement of QE1 led eventually to a 84bp rise in 10-year Treasury yields. QE1 began in late November 2008, with total asset purchases of USD 600bn being announced. This led initially to a rapid decline in yields to just 2.05% by the end of 2008, before they drifted up to 2.53% by mid-March 2009. Asset purchases were then increased further, and yields then rose to a peak of 3.95% in June 2009 "“ a rise of 140bp over three months. This compares with a rise of 70bp since the November FOMC meeting.
This would suggest that yields won’t go through the roof before Christmas (at the very least) and that it’s been news of positive economic data and the tax cuts that have driven recent rises in yields. As you can see from the below three month chart, yield rises are more of a two month than a two week story:
In addition, as BarCap told us last week, December is typically a low liquidity month and this will have had an impact, too.
There is a short-term need for a medium-term deficit plan – but not necessarily this week. Chill — after all, it’s the Holidays.
Related links: Everyone should relax about rising nominal yields – FT Alphaville Bernanke and the real costs of QE2 "“ FT Alphaville Inflation as (un)expected – FT Alphaville
WP Cumulus Flash tag cloud by Roy Tanck and Luke Morton requires Flash Player 9 or better.
Or select a previous briefing:
© The financial Times Ltd 2010 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
var oob = new Advert(AD_OOB);oob.init(); var adPop = new Advert(AD_CORPPOP);adPop.init(); var adRefresh = new Advert(AD_REFRESH);adRefresh.init(); clientAds.fetch(AD_MACROAD); clientAds.render(AD_MACROAD); clientAds.fetch(AD_MARKETINGRIB); clientAds.render(AD_MARKETINGRIB); clientAds.fetch(AD_TLBXRIB); clientAds.render(AD_TLBXRIB); clientAds.fetch(AD_DOUBLET); clientAds.render(AD_DOUBLET); clientAds.fetch(AD_INTRO); clientAds.render(AD_INTRO); clientAds.fetch(AD_HLFMPU); clientAds.render(AD_HLFMPU); clientAds.fetch(AD_HMMPU); clientAds.render(AD_HMMPU); clientAds.fetch(AD_TRADCENT); clientAds.render(AD_TRADCENT); clientAds.fetch(AD_MARKETING); clientAds.render(AD_MARKETING); clientAds.fetch(AD_BANLB); clientAds.render(AD_BANLB); clientAds.fetch(AD_MPUSKY); clientAds.render(AD_MPUSKY); clientAds.fetch(AD_MPU); clientAds.render(AD_MPU); clientAds.fetch(AD_WDESKY); clientAds.render(AD_WDESKY); clientAds.fetch(AD_NRWSKY); clientAds.render(AD_NRWSKY); clientAds.fetch(AD_ARTBOX); clientAds.render(AD_ARTBOX); clientAds.fetch(AD_FTHBOX); clientAds.render(AD_FTHBOX); clientAds.fetch(AD_TLBX); clientAds.render(AD_TLBX); clientAds.fetch(AD_FMBUT2); clientAds.render(AD_FMBUT2); clientAds.fetch(AD_LHN); clientAds.render(AD_LHN); clientAds.fetch(AD_MKTBX); clientAds.render(AD_MKTBX); clientAds.fetch(AD_OOB); clientAds.render(AD_OOB); clientAds.fetch(AD_POP); clientAds.render(AD_POP); clientAds.fetch(AD_BXBAR); clientAds.render(AD_BXBAR); clientAds.fetch(AD_DKTALRT); clientAds.render(AD_DKTALRT); clientAds.fetch(AD_DSKTICK); clientAds.render(AD_DSKTICK); clientAds.fetch(AD_PRNT); clientAds.render(AD_PRNT); clientAds.fetch(AD_INV); clientAds.render(AD_INV); clientAds.fetch(AD_MBATOP); clientAds.render(AD_MBATOP); clientAds.fetch(AD_MBABOT); clientAds.render(AD_MBABOT); clientAds.fetch(AD_MBALINK); clientAds.render(AD_MBALINK); clientAds.fetch(AD_SBHEAD); clientAds.render(AD_SBHEAD); clientAds.fetch(AD_FTNT); clientAds.render(AD_FTNT); clientAds.fetch(AD_1x1); clientAds.render(AD_1x1); clientAds.fetch(AD_CURRCON); clientAds.render(AD_CURRCON); clientAds.fetch(AD_CURRBOX); clientAds.render(AD_CURRBOX); clientAds.fetch(AD_CORPPOP); clientAds.render(AD_CORPPOP); clientAds.fetch(AD_REFRESH); clientAds.render(AD_REFRESH); clientAds.render(); setCurrentTime(1232358020000) Assanka.wp.processClipThis(); var gaJsHost = (("https:" == document.location.protocol) ? "https://ssl." : "http://www."); document.write(unescape("%3Cscript src='" + gaJsHost + "google-analytics.com/ga.js' type='text/javascript'%3E%3C/script%3E")); try { var pageTracker = _gat._getTracker("UA-1874623-1"); pageTracker._trackPageview(); } catch(err) {} if (typeof Inferno == 'undefined') { var eid = (document.cookie.match(/EID=(\d+)/)) ? document.cookie.match(/EID=(\d+)/)[1] : 'unknown'; pageTracker._trackEvent('Debug events', 'sr23715', 'Load failure for '+eid); setTimeout(function() { var d = new Date(); document.getElementById('infdebug23715').innerHTML = (''); }, 1000); } Read Full Article »