A message from our sponsor..the FED20 Oct 2023 00:34
Everyone in financial markets seems to have a different explanation for why US bond yields have reached their highest level in 16 years. now...distilled down to just three.
Jerome Powell started with what was not causing higher yields that translate to rising borrowing costs for business, government and households.
“It’s not apparently about expectations of higher inflation. And it’s also not mainly about shorter term policy moves,” the Reserve Bank chairman said on Thursday (Friday AEDT).
Federal Reserve Chairman Jerome Powell said the Fed was “attentive” to the rise in yields. AP
Powell means financial markets are not trying to guess what the Fed is going to do with interest rates in the short term because if they were, they would have pushed up yields substantially on shorter term yields such as 2-year bonds. Instead, the higher yields have been on longer dated bonds.
So, then why push up yields on longer dated bonds?
“Markets and analysts are seeing the resilience of the economy to high-interest rates. And they’re revising their view about the overall strength of the economy and thinking in the longer term, this may require higher rates.”
Second, Powell points to the fiscal side of the ledger.
“There may be a heightened focus on fiscal deficits,” he said, “concerns over fiscal deficits could be a longer-term factor.”
Powell has just returned from the latest World Bank and International Monetary Fund meetings in Morocco where he heard that a lot of “countries are facing the need for substantial amounts of revenue....[for] military, there’s also dealing with climate change”.
“It’s not a secret...we know that we’re on an unsustainable path fiscally. It’s not that the level of the debt is unsustainable, it’s not, it’s that the path we’re on is unsustainable, and we’ll have to get off that path sooner rather than later.”
Powell then moved on to the third reason: better compensation for putting your money in bonds compared to equities, especially if the supply of bonds is bigger, pushing down their price. Prices move in the opposite direction to yields.
“Another one you hear very often is the changing correlation between bonds and equities.”
“If we are going forward into a world of more supply shocks rather than demand shocks, that could make bonds, a less attractive hedge to equities. Therefore, you need to be paid more to own bonds, and therefore, the term premium goes up.”
Powell said these changes were all pointing to higher borrowing costs. “If you look at financial conditions indexes, they’re showing tightening and a lot of that is because of longer rates,” he said.
IT WONT BE THE SUPPLY SHOCKS BUT THE MILITARY SHOCKS ...QUITE LUDICROUS FOR NATIONS THAT REGARD THEMSLVES AS DEVELOPED....OR EVOLVED
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