Keeping in mind that the toppy-ticky print last spring (1.7650%) had the pundits a bit concerned about what would happen should the ten-year note drop enough to yield 2.00% (not a lot of good news could be teased out of that scenario)
1.6800% last, +0.0440%
On top of that the FT reported an hour ago that the ten-year breakeven at over 2.6% is now the highest in a decade.
Here is the Global Macro Monitor post I was going for when I was enchanted by his "U.S. Retail Sales Are 13.9% and 56 Months Ahead Of The Pre-Covid Trend" chart earlier today.
From GMM, October 20:
What Are Bond Yields & Breakevens Telling Us?
A very close friend posed the question in this post’s title to me the other day.
I laughed and said, “are you kidding me? I mostly ignore the bond market flapdoodle as it was nationalized long ago. Bond yields and breakevens are about as relevant as the price of sausage, Back In The USSR! Ergo, the bond market is not a real market with real price discovery.
Baby, It’s Foggy Outside
Unfortunately, policymakers continue to make policy based on totally distorted flight instruments, which is very dangerous when it gets foggy. The economy is foggy today, folks.
It looks like PK is starting to waffle, and seems, to us, he may be considering playing out his option on Team Transitory,
Why is it so hard to make a call on inflation right now? Because the current economy, still very much shaped by the pandemic, is, to use the technical term, weird. In particular, the standard measures economists use to distinguish between temporary price blips and underlying inflation are telling different stories. – Paul Krugman, NY Times
Krugman’s piece is a must read.
Fed Intervention In The “COVID” Bond Market
Maybe if we had a free bond market, we would have seen this inflation spike coming through a real and true bond yield and breakeven price.
The conventional wisdom is that the Fed has financed 40-50 percent of the debt the U.S. Treasury has put on its books during COVID, and that is confirmed by the data at 46.6 percent of all new issuance, including Treasury Bills. We dig deeper in the following table.
Look at the profile of the new debt that financed the COVID deficit, however.
The Fed has effectively purchased 75 percent of all new note and bond issuance and 160 percent TIPs issuance from March 2020 to September 2021. If they hadn’t, interest rates would have spiked higher, maybe 500 bps higher, and it is possible some of the auctions would have failed.
Why doesn’t the Treasury fund itself with more longer-term debt to lock in the lower rates? Because they can’t, which illustrates why T-Bill issuance was up $2.5 trillion during COVID.
Moreover, if you are going to repress coupon yields from moving to their equilibrium, you must also do the same in the TIPs market, otherwise breakevens would have gone wild and made no sense, especially given its a relatively illiquid market.
If there was real price discovery in the bond market, it may have tipped us off about a coming inflation spike and what markets really think about the path of future inflation....
....MUCH MORE
When the spending bills currently before Congress are passed, regardless of the final numbers, the Treasury is going to have to raise a lot of money, in addition to rebuilding the rainy-day minimum in the Treasury General Account.
And if the Fed is telling the truth about tapering its bond purchases, non-Fed buyers will have to step up.
The question of course is what yield they will demand to do so.
