Give Up, Barbarian. I’ve Got A Printing Press.

Give Up, Barbarian. I’ve Got A Printing Press.

I’d be remiss not to point out how explicit the language from central banks is becoming regarding their capacity and willingness to lean against higher bond yields.

Obviously, last week’s global bond selloff is still dominating the headlines and permeates pretty much every discussion between market participants and among analysts.

The Fed is behind the curve, and at this point, you have to think that’s purposeful. Officials have had multiple opportunities over the past several business days to say something overt or otherwise market-moving, but they’ve generally eschewed that kind of language in favor of a more even-keeled tone.

Perhaps it’s better that way. Let “lesser” deities try their hand first. The RBA was on the front lines last week, when yields rose dramatically and the market seemed unsatisfied that the bank understood the finer points of keeping the three-year on a leash.

Tuesday’s policy statement from the bank served as a reiteration of the RBA’s commitment to its stance. Bond purchases, Philip Lowe remarked, were brought forward in order to ensure smooth market functioning and should “further adjustments” be necessary, the bank is “prepared.”

The market didn’t seem satisfied, but it never is. At some point, possibly soon, traders will push the envelope too far and the RBA will respond in kind. It’s predictable.

ECB officials have been more forceful in their messaging. Isabel Schnabel grabbed headlines last week, and on Tuesday it was Fabio Panetta. Speaking during an online event, Panetta actually said that rising yields are “unwelcome and must be resisted.”

He may as well have been talking about an invading army, which I suppose is apt if you like the “vigilantes” headlines.

Bloomberg made a show of trumpeting a drop in weekly purchases by the ECB under PEPP last week, but the data lags and it’s redemption-inclusive. Also, note that this all came about rather abruptly. It was a “tantrum,” after all. The ECB’s pandemic asset purchase program is flexible by design and it’s nowhere near being out of firepower, especially considering December’s top-up (to €1.85 trillion).

Panetta wasn’t done. “We can intervene and recalibrate the pace of our purchases, and in the last 12 months we have been quite effective,” he added, during the same Tuesday remarks. “I think we can still be effective in steering market conditions and yields.”

I think so too, Fabio. You are, after all, armed with a printing press, while the proverbial “barbarians at the gate” aren’t.

Francois Villeroy was similarly adamant this week. “In so much as this tightening is unwarranted, we can and must react against it, starting with an active flexibility of our PEPP purchases,” he said at a conference on Monday.

Similarly, Luis de Guindos had a few words for the vigilantes. “We have recently seen an increase in yields, which is partly due to the expectation of higher inflation in the United States because of President Biden’s program, as well as the increase in commodity prices and the recovery in global demand,” he remarked, in an interview. “If we reach the conclusion that [this increase in nominal yields will have a negative impact on financing conditions], then we are totally open to recalibrating our program including the envelope of our pandemic emergency purchase program if necessary.”

I realize all of this is dry and a bit repetitive, but I highlight it to underscore one simple point: This isn’t “a market.”

As much as this irritates “purists” and those who, after a decade of ultra-accommodative policy still refuse to submit, bond yields in developed economies are just policy variables. Yes, the market can influence them, but only until policymakers decide to disallow it.

There’s no such thing as a “vigilante” in these conditions. To suggest otherwise is to deny reality. It’s true (I suppose) that past a certain point, conjuring fiat to tamp down bond yields is inflationary, but that raises a bizarre question: How do bonds price in inflation generated by money-printing aimed at suppressing bond yields?

Yes, the whole thing may one day buckle under the weight of its own absurdity. But between now and whenever that is, suggesting that people who print money can somehow lose at a game where victory entails purchasing assets denominated in the money they print seems like a kind of madness.


 

5 thoughts on “Give Up, Barbarian. I’ve Got A Printing Press.

  1. “There’s no such thing as a “vigilante” in these conditions. To suggest otherwise is to deny reality. It’s true (I suppose) that past a certain point, conjuring fiat to tamp down bond yields is inflationary, but that raises a bizarre question: How do bonds price in inflation generated by money-printing aimed at suppressing bond yields?”

    You’re asking the right question. My personal view is eventually the market will fully digest the fact that bond issuance itself is not necessary for government funding (and terming out debt has no benefit for an entity that never faces rollover/refinancing risk anyway) and term premia on DM sovereign debt will drop to zero and yield curves will simply collapse to policy rates/policy rate expectations, regardless of the market’s view on inflation.

    What will reflect higher inflation risk if sovereign curves cannot? My guess is the credit term premium on corporate bonds (i.e. a much steeper credit spread curve), with credit spreads having to reflect default, liquidity AND inflation risk.

    1. Seems spot on to me. But under a YCC regime in which all rates are articificially surpressed, what happes to everyone’s favorite macro concern, velocity of money? Sounds like we end up with a U.S. economy that looks more like The Villages — countless numbers of people spending as if they were living on a fixed income — than a dynamic jobs and wealth creating engine. (Not that that’s what we have now.)

      1. I think in such a world of high money velocity (and therefore inflation pressures), you will see this reflected in interbank rates. As a result, we may see swap spreads widen out significantly.

        One of the bizarre features of the post-GFC environment has been swap spreads at the ultra long end of the curve trading BELOW government yields in many developed markets (in Australia, for example, the 30y swap rate is around 50bps below the 30-year government yield). We may also see swaps increasingly becoming the benchmark to price corporate bonds.

  2. Who are the ubiquitous “vigilantes” that are referenced? Are they pensions? Banks? If they’re the same entities benefitting from the fed response that will ultimately be elicited, wouldn’t we call that “winning”?

  3. How do bonds price in inflation generated by money-printing aimed at suppressing bond yields?

    They don’t. Historically, this is how regimes deal with debt bubbles – foster inflation and keep rates down by hook or crook. Ask Ray Dalio.

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