The dangerous cocktail of rising global bond yields and falling inflation.

in politics •  7 years ago 

QE adjustments required

Core CPE inflation has been falling all year in the US and is now back down to 1.4pc. Real interest rates are therefore galloping higher.

The change in supply of government debt - the part that will no longer be soaked up by the central banks - will ratchet up towards $3 trillion a year quickly as the US Federal Reserve reverses QE, and others follow.



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This time developing countries can no longer be counted on to snap up the West's safe-haven bonds. Saudi Arabia is running down its foreign exchange reserves by almost $100bn a year to cover its budget deficit. Several OPEC peers are in the same boat. China, East Asia, and Latin America are accumulating reserves at a much slower pace than a decade ago.

The Fed is expected to start selling its bond portfolio as soon as September. Within a year after that it plans to dump $50bn of US Treasuries and mortgage bonds on the market each month.

The Bank of Japan is quietly cutting back its QE purchases. The pace has shifted down from around $60bn a month to nearer $40bn. Hiroshi Shiraishi from BNP Paribas said the authorities are “technically tapering”.

ECB limits

The European Central Bank is nearing the limit of what it can buy. Under a self-imposed rule it may purchase no more than 33pc of the bond issues from each eurozone country. The ECB will soon hit this cap in Portugal. It may do so in Germany and Finland by early Spring, and in Holland and Spain shortly after.

It would be extremely hard for the ECB's Mario Draghi to change the rule, except in an emergency. Under pressure from Germany's Bundesbank, the ECB has tied itself to the mast by declaring that going further would be tantamount to central bank financing of fiscal deficits - banned under EU treaty law.

Closely-watched "breakeven" rates are warning that US inflation will still be just 1.62pc five years hence. What are the markets are really saying is that the world's biggest economy still has one foot in deflation. The eurozone is even deeper into this trap. It has looks all too like Japan.

Mr Rajan said the structure of global finance is badly out of joint. Bond and equity markets are telling different stories. Their messages are incompatible. The worry is that highly-priced equities will have to capitulate to restore the equilibrium.

Central bankers are keeping their fingers crossed. While there is no 'pact' as such by the Fed, ECB, the Bank of Japan, the Riksbank, the Bank of England, and others, they are co-ordinating closely. The calculus is that if they move methodically together this will steady markets.

It is no coincidence that most were singing from the same hymn sheet at the ECB's annual forum last week in Sintra, Portugal. The fond hope is that none will be singled out for rough treatment and that wild swings currencies will be averted.

But as the military saying goes, no battle plan survives the first encounter with the enemy.

@mindhunter


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I find it curious that everyone keeps say inflation is going down when everything is going up. Just found out starting the 1st of july our electricity bill will be increasing by a small 15-20% as well as everything else. Which planet do they get these bullshit inflation figures from? Thanks

Well, as Goebbels taught us, if you say a lie often enough, enough people will believe it to make it politically viable.

The UK inflation rate is at a near four-year high at 2.9%+ but as we all know, what goes up, must come down. Your feeling is short term, but the long term forecasts are not good!

We've reached the end of this bond bull. There is nowhere to go but up (or financial crash) for yields. This is the result of financial repression and ignoring the free market. You can't just print money to buy bonds forever.

Thanks!

PS - US CPI is manipulated nonsense, but I bet we all knew that! Hedonic adjustment is a hell of a drug.

I predict some kind of bond implosion in 2018/9??

Nice blog... Upvoted and followed
Follow back @gauravchugh Thanks

I love $ more than euros :p

I'll go with the £/Bitcoin for now @jwolf :)

absolutely Bitcoin, but between Euro and Dollars I am choosing Dollars

seems like the only tool they have now is to raise rates, but the effect of an interest rate rise could be the pin that pops the bubble . am now following you and upvoting

Pricking the bubble is the only way @daydreams4rock!

i agree -- low rates are draining the savings of the whole middle class

The middle classes are currently being gutted both here in the UK and the US.

and Australia where i am

Lucky mongrel ;)!

yes -- someone has to live my life- see some of my life on my blogs -- it is almost a dream come true

Federal Reserve (FED) will sell bond portfolios in September 2017? What does that mean? The Fed have share holders? Does the bonds mean shares? Are share holders powering down, like cashing out of their bonds or shares or what is happening? What does it mean? Are we beginning to move more to crypto coins globally?

It means selling off the debt to other nations. Markets are, however, increasingly anxious for the Fed to give a clearer steer on the timing and details of its previously announced plan to reduce this year its $4.2 trillion portfolio of Treasury debt and mortgage-backed securities, most of which were purchased in the wake of the financial crisis to help keep rates low and bolster the economy!

How do you sell off debt? The debt that USA gov owes? Sounds scary.

The United States allowed China to become one of its biggest bankers because the American people enjoy low consumer prices. Selling debt to China funds federal government programs that allow the U.S. economy to grow. It also keeps U.S. interest rates low. But China's ownership of the U.S. debt is shifting the economic balance of power in its favor.

Can cryptocurrency compete or stop China or something?

Crypto can remove people from their debt ridden governments - I know that for a fact!! GO STEEM!!

Great post - the scales of justice are balanced here! Upvoted and follow! I've also done a couple of posts on this topic - QE and QT. You may like them
https://steemit.com/steemit/@oldmanjustice/qt-no-fix-for-qe-nothing-can-fix-the-imminent-economic-collapse
https://steemit.com/steemit/@oldmanjustice/i-want-to-be-wrong-about-the-imminent-economic-collapse

This looks like an out-of-control experiment.. we will see what happens

An ultra-large explosion of some kind no doubt!

Well the U.S. economy is being driven by credit and easy money, we have stagnant wages, massive federal debt and high unemployment. If credit is tightened while our economy is weak you may see a recessionary trend. Could be catastrophic until government expenses are reigned in and taxes are cut.

I can see the US going into a period of stagflation which has been happening to Japan for the last 10 years or so!

I would argue we've already been in this scenario since the 2008 housing crisis. Inflated asset prices due to excess credit issued by the bank of japan, a central bank, lead to the bubble and bust. BOJ then "bailed out" major industries leaving decades of low employment and wage gains, with the taxpayer footing the bill. We practically copy/pasted it with sub-prime mortgages, inflating housing prices, bubble burst, bailouts and taxes.

Yet more cut and pasting on top of old cutting and pasting = DOUBLE OUCH!!

Nice article @mindhunter, upvoted! Would you like to read my article about an undervalued oil exploration stock? I'm trying to start a community about investing and stocks on Steemit (Because it is still very small). I would like to share some thoughts with someone who knows about the stockmarket. Thank you!