The Fed’s “quantitative tightening” program (herein, “QT”) plus the Federal government’s financing of spending and of tax cuts with Treasury auctions, may be pushing bond prices down and yields up- even if ever so slightly.
So, we may, at least in sentiment, be even flatter than we look.
Rates might be lower- and the curve flatter- were it not “but-for” past and future Treasury auctions and QT. To say that significant government actions and interventions from the monetary side (the Fed) and the fiscal side (the Treasury) are not affecting the economy or interest rates or the yield curve, I think would be foolhardy and naive.
Domestic, international, institutional, individual, and sovereign investors may be refraining from bond purchases because of the expectation of future QT and the expectation of future Treasury auctions, and a resulting government-caused “ceiling” on prices. Of course, yield is attractive, but only to the degree that principal is not more-greatly depleted.
Even as longer term Treasury bond yields have gone slightly lower as of late- investors still may be operating with the expectation that yields may be subject to a “floor”, which is preventing further bond buying, which would, otherwise, be occurring.
Thus, maybe the yield curve would be flat – or inverted – today, “but-for” artificial government stimuli pushing prices lower, along with investors’ concerns and responses thereto. How can it be legitimately guaranteed that a combination of actions by The Treasury, The Federal Reserve, and expectations on the part of institutions, individuals, and nations, has no affect on financial outcomes- including the shape of the yield curve. Clearly, that’s impossible.
If interest rates are rising, solely, or primarily, due to government interventions, and the resulting expectation and concerns, sans inflation, especially sans income growth … this would not be good.
Chairman Powell says he sees no housing bubble. That is almost an affirmation of the existence of one. Mortgage costs are higher, and incomes are stagnant. Powell and the Fed are raising interest rates while expressing confusion as to why there is no wage growth. Yet, the Fed is determined to normalize its balance sheet and raise interest rates, or cause them to rise, on all ends of the curve, without any real signs of inflation.
If the Fed does not see housing risk based on today’s prices while incomes are stuck and interest rates rise, then the Fed is simply mistaken- or does not want to scare the market. But there is no way that high housing prices can be rationalized in an economy with stagnant wages. Stagnant incomes, academically, are in direct conflict with growing home prices. If Powell announces a bubble, it becomes a bubble- and causes a selloff, especially since the Fed controls the capital used for housing (i.e. interest rates). It becomes a self-fulfilling prophecy if the Fed says it, and could take down the economy.
As for Powell’s comments, I’d suggest not taking real estate advice from an economist (well, technically, a lawyer). Anyhow, if you want to check the Fed’s record on housing expertise- just see 2005-2007.
If the aforesaid, is, in fact, accurate about interest rates and the yield curve (meaning rates are going higher while incomes are not), let’s hope supply-side tax cuts trickle down with business owners and corporations spending their extra tax monies, and that capital expenditures trickle down into higher wages. Interest rates hikes without wage growth can’t be good unless the trickle of supply-side tax cuts is really more of a “gusher”, and new opportunities, thus, arise for more workers and entrepreneurs. Without higher incomes for the demand side, even growth from business spending on cap-ex will be- ultimately- fruitless.
Were in not for fiscal stimulus, the Fed would not even be concerned with the prospect of inflation (or growth), rates might be lower (or at least not going much higher), and the yield curve could have flattened or inverted by now (if not prevented from doing so by the artificial input of QT, which the Fed may have decided to cease). Growth and inflation would both have likely been halted. It remains to be seen how the fiscal stimulus plays-out.
Unemployment is low, but wages are not rising. The Fed is standing-pat on its “Phillips-curve” position that inflation is inevitable. The fact is that large companies, while hiring, are not replacing the wages of the better paying jobs they are replacing on Main Street. From pizza shops to hardware stores, from liquor stores to clothing stores, from signage stores to cleaning companies- large companies have decimated Main Street jobs. The people who get new jobs in large companies have to work more and make less. For example, a hardware store employee or owner who wants to stay in the hardware industry has to go work at Home Depot at a lower wage and longer hours then his previous assistant manager job at a local store. The growth of large companies that are getting larger and taking market share from smaller retailers due to their better prices derived from their enormous scale is why the jobs are there- but the wages stink. The data speak for itself.
The market is also still whispering about China potentially selling significant amounts of Treasuries (which I doubt), causing investor trepidation. It could, actually, be the opposite. In an effort to keep our consumer spending, China could buy, and presently be buying, U.S. bonds (which would also be a “governmental” intervention, by a different government, in bonds and yields). But, this perception of China selling Treasuries (plus QT and Treasury auctions) could be scaring bond investors into cash.
I’m not suggesting that growth is impossible. But it must be organic- there must be consumer/employee participation through income growth. There must be demand side growth and not just EPS growth due to buybacks and growth from cap-ex spending that may find little demand side customers because of low wages. GDP should be looked at closely to determine why consumer spending and business spending is higher, and in what industries growth is being realized. There are stories below the numbers. How much growth is from government spending?
The yield curve always speaketh loudly, yet, it may be getting stifled by government interventions, to some degree.
Neil S. Siskind, Esq., President
The Siskind Law Firm
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– Memorial Sloan Kettering Cancer Center, Volunteer
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Neil Siskind’s Pro Bono Work:
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Neil Siskind’s Government Work:
– Suffolk County District Attorney’s Office, Boston, MA, 1994, Intern
– Office of Senator Christopher J. Dodd, Newington, CT, 1992, Intern
– Hartford County Department of Probation, Hartford, CT, 1991, Intern
Neil Siskind’s Community Assistance:
Financed & operated a legal clinic providing low-cost legal services to struggling Long Islanders during the recession to help clients resolve debt, organize finances, and launch new businesses.
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