Strategist Who Nailed S&P Last Cycle Talks ‘Altogether New Regime’
"Our view has (always) been that crossing an imaginary red line can't be a sufficient reason to pay attention," Deutsche Bank's Aleksandar Kocic said, in a note comparing and contrasting the Fed's fledgling tightening campaign with the last hiking cycle.
He was referring to the four-decade downtrend in US 10-year yields. Thursday's pre-holiday session found 10s cheapening back to levels consistent with a breach (figure below).
Earlier this week, I gently suggested that the real story in 2022 i
So it sounds like we have entered a second “Taper Tantrum,” but with a strong inflationary backdrop and real QT in the near future. What spared us in 2013 was that inflation was under control, and the government eventually resumed QE. What could possibly save us this time? War in the Ukraine truly complicates things as well. At the moment, I feel like I have money with no place truly safe to put it.
The disconnect between low yields and high inflation may resolve with inflation dropping or yields rising.
Or it may not resolve, if it isn’t actually a disconnect.
High inflation is too much (real economy) money chasing too few goods and/or services.
Low yields is too much (financial economy) money chasing too few assets.
High inflation would be incompatible with low yields if UST were competing with other assets purely on the investment merits. But is it really? There is so much money that “has” to be invested in UST. Bank capital rules, US trade deficit, USD reserves, safety, liquidity, all force it. Even with the Fed out of the game, there is a lot of structural demand for UST.
We could see UST yields stay much lower than seems consistent with inflation, and lower than other govt yields.
But if Treasury issuance pushes UST supply substantially above the structural demand, so that marginal UST has to compete for investment flows with other assets, then things could get very messy.
“There is so much money that “has” to be invested in UST. Bank capital rules, US trade deficit, USD reserves, safety, liquidity, all force it . . ”
This is a good point and I’m curious how it compares to say pre-GFC times. I would guess this is a related problem to the repo funding issues of fall of 2019–Fed needed a lot more reserves than they may have thought.
Gotta believe the burgeoning economic slowdown will provide a near term cap on the dramatic increase in treasury rates …
…we shall see…