Bond yields should be lower. At least at the long-end.
That’s not an assessment based on any fair value model. And it’s not even my assessment. Rather, it’s what you might say if you were musing idly about recent macro developments and market pricing for the Fed.
“Inflation [was] whipped from 9% to 3% [and] everyone expects the Fed to fold [at] the first sign of trouble,” BofA’s Michael Hartnett remarked, noting that 110bps of cuts are still priced for 2024.
I’d note that 110bps next year wouldn’t count as especially aggressive. That’s just one 25bps increment per quarter, hardly indicative of panic easing. Still, Hartnett’s point is well taken.
But it’s not just Fed easing expectations and falling inflation in the US that ostensibly argue for lower long-end yields. Notwithstanding jobless claims that continue to defy expectations for an imminent surge, the labor market is cooling.
The pace of job creation continues to decelerate, but in benign fashion. Wage growth has receded in tandem.
Meanwhile, the European economy is stuck in neutral at best, Germany is in a recession and we all know what’s happening in China. Dual recessions in the world’s second- and fourth-largest economies don’t exactly scream for higher bond yields.
Oh, and then there’s the promise of an A.I.-enabled productivity boom, which would be disinflationary in the near-term, even if, as Hartnett not-so-subtly suggested, it might be a pipe dream.
So, what gives? Why are long-end yields stuck higher? Most of you can answer that question. It’s “because the term premium is rising due to big deficits and debt at a time of war not peace, protectionism not globalization, socialism not capitalism and labor not profits,” Hartnett wrote.
The figure above illustrates the labor over profits dynamic. Public support for unions is on the rise.
While we’d all (hopefully) agree that peace is preferable to war, market participants have an ingrained aversion to protectionism, socialism and labor, all of which in one way or another threaten to subtract from what’s “rightfully” due to shareholders.
Maybe — and I’m just tossing this out there — we should remind ourselves that shareholder capitalism isn’t the only kind of capitalism. If, in our determination and zeal to subjugate every other stakeholder to the profit motive, we create the social conditions under which desperate voters gravitate towards their party’s poles, we have only ourselves to blame when things go left — figuratively or literally.
Great point, very well said.
The most stunning point in this post was found in the next to last paragraph, starting: “… market participants. I’m not a socialist (although a quick tour through the Mayflower Compact will show that the Pilgrims surely were) although I was an econ major and at the tender age of 20 and I could see why so many of my fellows leaned in that direction. Like most other childhood ailments, the condition passed quietly in a couple years as I started my doctoral program in finance. I am, however, very sensitive to the plight of exploited workers. My family’s company was contracted with by the UAW, 15 miles from a dying automaker (Studebaker). I helped negotiate two contracts for our firm. The union president was truly illiterate, couldn’t actually read the contracts and signed with an X. Compared to our competitors we were the ones being exploited and that didn’t leave me as a great supporter of unionized labor. However, soon after taking my first solid job as a prof at a unionized regional state university, I soon discovered what exploited labor really looked like. Our faculty earned average pay 45% below that of faculty at the state’s flagship university in similar positions. It was so embarrassing that our Provost called me, after a couple years when I got tenure, and asked me to join the union and become a negotiator for the faculty. It turned out that our pitiful salary and benefit levels to which we were subjected, were also punishing the administrators we worked for. He begged me to get the union to ask for significant economic improvements, promising to agree to our “demands,” helping us and themselves as well. Altogether, I negotiated five contracts for the faculty (and worked for management on one other). The lot of the faculty was improved but I know it is once again under pressure.
While shareholders are entitled to a fair return on their investments, so, too, should people who do the work that makes the company’s profit be paid a “living wage.” I don’t know where this puts me on the social scale (don’t care about labels) but neither do I care much for “market participants” who gladly extract as much as they can from the people who actually create the basic values they enjoy. The stock market is a garage sale where “greater fools” are happy to gamble their “dry powder” based on the hard work of people who ultimately can’t save enough to fix a flat or a broken clothes dryer. To this my sense of justice cries enough! Market participants can take a hike. I’m a bit weary of donating a quarter of my income every year for those in need to help clean up the mess those gamblers leave behind.
H. I have always been pleased to see you sincerely populate these pages with sensitivity to those in the bottom 50%. Thanks very much for that.