economy Markets

‘Higher Bond Yields Without Better Growth Can Quickly Become Self-Defeating’, Goldman Warns

It's still too early for a sustained rotation within and across assets.

It's still too early for a sustained rotation within and across assets.
This content has been archived. Log in or Subscribe for full access to thousands of archived articles.

4 comments on “‘Higher Bond Yields Without Better Growth Can Quickly Become Self-Defeating’, Goldman Warns

  1. What comes to mind is that when monetary policy is conducted with the goal of perpetuating the wealth effect and the goal is accomplished by finally hyper inflating asset prices at the expense of real returns then we have altered one of the primary rules of our existing financial system.. Where we inevitably wind up is …right where we are now…

  2. vicissitude

    What Happens if Central Banks Misdiagnose a Slowdown in Potential Output
    September 27, 2019

    In the last few decades, real GDP growth and investment in advanced countries have declined in tandem. This slowdown was not the result of weak demand (there has been no shift along the Okun curve), but of a decline in potential output growth (which has shifted the Okun curve to the left). We analyze what happens if central banks mistakenly diagnose the problem as insufficient demand, when it is actually a supply problem.

    Moreover, low interest rates will lead to an increase in the capital output ratio, a low return on capital and high leverage. We show that these forecasts are in line with what has happened in major advanced countries.

    The results in this paper suggests that the often-held view that investment in advanced countries is ”too low” may not be correct. Investment is indeed lower than in the past, but this is because n + g has fallen. Raising investment without a corresponding increase in TFP ( total-factor productivity *) or working age population growth may simply further boost capital-output ratios and further reduce the return on investment. In fact, if a country with
    low n + g has high gross investment, it will not end up with high growth, but with high
    capital consumption, as the example of Japan demonstrates.
    They also suggest that a prolonged period of low policy rates may lead to a decline
    of the natural rate of interest. If low policy rates lead to a high capital-output ratio,
    continued high gross investment (and thus low policy rates) is needed just to stay put.

    https://www.imf.org/en/Publications/WP/Issues/2019/09/27/What-Happens-if-Central-Banks-Misdiagnose-a-Slowdown-in-Potential-Output-48643

    TFP is calculated by dividing output by the weighted average of labour and capital input, with the standard weighting of 0.7 for labour and 0.3 for capital.[3] Total factor productivity is a measure of economic efficiency and accounts for part of the differences in cross-country per-capita income.[2] The rate of TFP growth is calculated by subtracting growth rates of labor and capital inputs from the growth rate of output.[2]

  3. One of the few instances when timing bond funds ended up being a decent strategy.

  4. vicissitude

    The Japan model is worth pondering, i.e., how do lower rates stimulate an economy, versus stimulate bank reserves. QE seems to be fairly pointless in real world outcomes and as the paper above notes, as interest rates go lower, that increases non-performing loan problems, which of course causes banks to take on greater risks in their casinos. While there may be short term spikes in market activity related to QE and pending ZIRP policy, the longterm deflation trap is something that will be a Yuge part of the future.

    Looks like yields will continue downward globally for at least the next year and if a recession phases in, rates will go towards zero globally, so get ready to party with the big banks!

    Random FRED chart on interest rate spreads: https://fred.stlouisfed.org/graph/?g=pd1Y

    Curious matters:

    ==> The United States 10 Years / Germany 10 Years Government Bond spread value is 213.7 bp (last update 19 Oct 2019 20:15 GMT+0).

    Spread changed -3.6 bp during last week, -16.2 bp during last month, -60.6 bp during last year.

    The United States 10 Years / Germany 10 Years Government Bond spread reached a maximum value of 279.6 bp (6 November 2018) and a minimum value of -91.6 bp (18 December 2008)*.

    ==> The Japan 10 Years / Germany 10 Years Government Bond spread value is 24.3 bp (last update 19 Oct 2019 18:15 GMT+0).

    Spread changed -1.6 bp during last week, -4.5 bp during last month, +54.7 bp during last year.

    The Japan 10 Years / Germany 10 Years Government Bond spread reached a maximum value of 48.4 bp (15 August 2019) and a minimum value of -70.2 bp (15 February 2018)

Leave a Reply to vicissitude Cancel reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Skip to toolbar