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
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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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