On Friday’s market close, traders were talking about the 10-year Treasury yield reaching 5%. Right now, it’s at 4.49%. Other short term rates were:
- The one-month Treasury bill is at 5.55%.
- The two-month T-bill is 5.60%.
- The three-month T-bill is 5.55%.
- The six-month T-bill is 5.53%.
- The one-year T-bill is at 5.46%.
- The two-year note is at 5.03%.
This inverted yield curve (10-year rates lower than short term yields) has been the situation for over a year.
When might rates stabilize or reverse is a topic for any CEO trying to manage multiple ALM risks. But must rates go back down? Or are are markets developing a new normal, higher yield curve?
This week I will look at some industry data about how this rise over the past 12 months has affected credit union liquidity.
Many economic observers have been puzzled why the highest short term rates this century have not stalled the economy, caused a recession, or even undercut the positive stock market gains. GDP is still growing.
But one person thinks this not-too-hot, not-too-cold economy must face a day of reckoning, unless interest rates come down soon. This is certainly not the Fed’s latest policy intent from their September meeting.
Kelly Evans is a commentator on CNBC’s The Exchange. For most of this year, she has been critical of the Fed’s increasing interest rate steps. She cites data from analysts which lead her to believe a recession is inevitable, unless the Fed pulls back quickly.
All of her columns last week examined the sources of interest rate pressures. These include the changing line up of who is buying Treasury debt, the increased burden from rising federal budget deficits, and why the zero interest rate era of quantitative easing is possibly over.
She has been sounding Cassandra-like warnings that the Fed’s rate rises are going to break something in the economy-a soft landing is not likely.
Here is an unusual Saturday column listing all of her commentary from last week. If you have time to skim only one, start with Friday’s because I believe it summarizes the forces she thinks are now manifested in growing market jitters.
Her Edited Column
“This was an important week in global markets. Long-term government bond yields showed early signs of a “disorderly” climb, not so much because of any improvement in the economic outlook, but concerningly, as investors seem to be testing how high rates need to go in a high-debt, high-deficit landscape where the key buyer of government bonds last decade (central banks) has vanished from the scene.
Central banks altogether bought $23 trillion of assets (primarily government debt and U.S. mortgages) in the past 15 years, according to Bank of America’s Michael Hartnett. That “liquidity supernova” caused “big asset price inflation…and in recent years subsidized massive U.S., U.K., and European government spending,” he wrote yesterday.
Now, that excess is unwinding. . .
So how did we get here? Here’s a recap of the pieces that examined that issue this week.
Monday: The $2 trillion deficit. How did we get here? A quick summary of growing government spending and flat revenue growth.
Tuesday: Will the deficit require the Fed to restart QE? The difficulty in reducing government spending.
Wednesday: When will markets force Washington’s hand? Unless fiscal spending is reduced, there is no telling how high rates might go.
Thursday: If bond yields don’t start dropping… her conclusion: If yields don’t start falling sharply on weaker data–as we’re expected to get in the fourth quarter–investors will really start panicking and rates will rise.
Friday: The sovereign debt bubble is bursting. This is her strongest warning. It starts by critiquing Modern Monetary Theory which asserted government deficits don’t matter. Here is an except:
“By the end of the 2010s, “austerity” talk was ancient history. Global bond yields simply weren’t rising, no matter how much debt governments were issuing. In 2019, almost a quarter of global government debt carried negative yields; it seemed markets were practically begging policy makers for more and more of it, with permission to juice their economies. The New York Times started carrying op-eds promoting the idea of “Modern Monetary Theory,” or near-limitless deficit spending; even mainstream economists like Robert Shiller seemed to half-endorse it.
“And if you really want to take a deeper dive, check out CBO’s writeup (from February) of the U.S. fiscal picture for the next ten years. You can see why markets are getting jittery.”
End
Tomorrow I will review the liquidity trends in credit union balance sheets for the twelve months ending June 2023.