The Return of the PIGS: 10Y Italy, Greece Yields Spike Over 40 BPS

By Anthony B. Sanders

2Y Italian Yield Spikes 153 BPS

A general rule of thumb is that whenever sovereign yields spike by over 10 basis points, it is a big deal.

So Italy and Greece 10-year sovereign yields spiking over 40 basis points this morning is a big deal! The third PIG (Portugal) is up 11.3 BPS.

sov10

For the 2-year sovereign debt, Italy is up over 153 BPS.

Continue reading The Return of the PIGS: 10Y Italy, Greece Yields Spike Over 40 BPS

Why It’s Different This Time

By Steve Saville

One of the financial world’s most dangerous expressions is “this time is different”, because the expression is often used during investment bubbles as part of a rationalisation for extremely high market valuations. Such rationalisations involve citing a special set of present-day conditions that supposedly transforms a very high valuation by historical standards into a reasonable one. However, sometimes it actually is different in the sense that all long-term trends eventually end. Sometimes, what initially looks like another in a long line of price moves that run counter to an old secular trend turns out to be the start of a new secular trend in the opposite direction. We continue to believe that the current upward move in interest rates is different, in that it is part of a new secular advance as opposed to a reaction within an on-going secular decline. Here are two of the reasons:

The first and lesser important of the reasons is the price action, one aspect of which is the performance of the US 10-year T-Note yield. With reference to the following chart, note that:

a) The 2016 low for the 10-year yield was almost the same as the 2012 low, creating what appears to be a long-term double bottom or base.

b) The 10-year yield has broken above the top of a well-defined 30-year channel.

c) By moving decisively above 3.0% last week the 10-year yield did something it had not done since the start of its secular decline in the early-1980s: make a higher-high on a long-term basis.

Continue reading Why It’s Different This Time

S&P 500 Dividend Yield Is Now Less Than 3-mo Treasury Bill Yield

By Anthony B. Sanders

Last Time Was Before Lehman Bros, Bear Stearns, Fannie Mae and Freddie Mac Collapsed

The last time that the S&P 500 dividend yield was below the 3-month Treasury bill yield was back in February 2008, before both Lehman Bros and Bear Stearns collapsed.  And before Fannie Mae and Freddie Mac were placed into conservatorship on September 6, 2008.

But yes, for the last several trading days the S&P 500 dividend yield has been BELOW the 3-month Treasury bill yield once again.

sp5003mo

Oddly, Fannie Mae and Freddie Mac are STILL in conservatorship with their regulator, FHFA while Lehman Brothers and Bear Stearns are but a grim reminder of the financial crisis.

On a side note, the actor to the left of Ryan Gosling in the film “The Big Short” is a former student of mine.

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My Ridiculously Specific Expectation for 10-year Interest Rates

By Michael Ashton

I try to stay away from making predictions. I don’t see the upside. If I am right, then yay! But after the fact, predictions often look obvious (hindsight bias) and it is hard to get much credit for them. By the same token, if I am wrong then the ex post facto viewer shakes his head sadly at my obtuseness. Sure, I can make a prediction with a very high likelihood of being true – I predict that the team name of the 2019 Super Bowl winner will end in ‘s’ – but there’s no point in that. This is one of the reasons I think analysts should in general shy away from making correct predictions and instead focus on asking the correct questions.

But on occasion, I feel chippy and want to make predictions. So now I am going to make a ridiculously specific prediction. This prediction is certain to be incorrect; therefore, I just want to observe that it would be churlish of you to criticize me for its inaccuracy either before or after the fact.

Ten-year Treasury rates will break through 3% for good on May 10, and proceed over the next six weeks to 3.53%. As of this Thursday, year/year core CPI inflation is going to be 2.2% or 2.3%, and median CPI over 2.5% and nearing 9-year highs. At that level of current inflation, 3% nominal yields simply make no sense, especially with the economy – for now – growing above trend. Two percent growth with 2.5% inflation is 4.5%, isn’t it? There is also no reason for 10-year real yields to be below 1%, so when we get to that 3.53% target it will be 1.08% real and 2.45% expected inflation (breakevens).

Continue reading My Ridiculously Specific Expectation for 10-year Interest Rates

Wealth-Destroying Zombies, Report 6 May 2018

By Keith Weiner

The hot topic in monetary economics today (hah, if it’s not an oxymoron to say these terms together!) is whither interest rates. The Fed in its recent statement said the risk is balanced (the debunked notion of a tradeoff between unemployment and rising consumer prices should have been tossed on the ash heap of history in the 1970’s). The gold community certainly expects rapidly rising prices, and hence gold to go up, of course.

Will interest rates rise? We don’t think it’s so obvious. Before we discuss this, we want to make a few observations. Rates have been falling for well over three decades. During that time, there have been many corrections (i.e. countertrend moves, where rates rose a bit before falling even further). Each of those corrections was viewed by many at the time as a trend change.

They had good reason to think so (if the mainstream theory can be called good reasoning). Armed with the Quantity Theory of Money, they thought that rising quantity of dollars causes rising prices. And as all know, rising prices cause rising inflation expectations. And if people expect inflation to rise, they will demand higher interest rates to compensate them for it.

The quantity of dollars certainly rose during all those years (with some little dips along the way). Yet the rate of increase of prices slowed. Nowadays, the Fed is struggling to get a 2% increase and that’s with all the “help” they get from tax and regulatory policies, which drive up costs to consumers but has nothing to do with monetary policy. Nevertheless interest rates fell. And fell and fell.

Continue reading Wealth-Destroying Zombies, Report 6 May 2018

Will Rising Bond Yields Send Stock Prices Tumbling?

By Elliott Wave International

Conventional Wall Street wisdom says “rising rates are bad for stocks.” Let’s put that belief to a test.

One of the big financial news stories on April 24 was that the 10-year Treasury yield hit 3% for the first time since 2014.

The other big financial news story was that the DJIA closed 424 points lower on that day.

As you probably know, the conventional wisdom on Wall Street is that investors will sell stocks in favor of bonds when yields reach an attractive level. So, it’s not surprising that many pundits blamed the DJIA’s triple-digit decline on rising bond yields.

Here’s a sample April 24 headline along with higher bond yield warnings from the past few months:

  • Here’s the threat to the stock market from rising bond yields (Marketwatch, April 24)
  • Rising bond yields could win next round in battle with stock market (CNBC, Feb. 7)
  • How Spiking Bond Yields Could Topple a Stock Market Rally (Bloomberg, Feb. 4)

But, is the conventional wisdom that says higher bond yields will send stocks lower correct?

Well, our research reveals that there is no consistent correlation between interest rates or bond yields and the stock market.

Take a look at these charts from Robert Prechter’s 2017 book, The Socionomic Theory of Finance:

Continue reading Will Rising Bond Yields Send Stock Prices Tumbling?

What Is the Relationship Between Interest Rates, Growth and Inflation?

By Charlie Bilello

Interest rates are on the rise, at their highest levels in over 4 years. What is that telling us, if anything, about growth and inflation? Let’s take a look…

While you often hear commentators suggesting there is a strong relationship between bond yields and the real economy, the evidence seems to be lacking. Since 1930, the correlation between annual change in real GDP and the 10-year treasury yield is effectively 0 (-0.05).

Continue reading What Is the Relationship Between Interest Rates, Growth and Inflation?

US Treasury 10Y Yield Pierces 3% Barrier, 30Y Mortgage Rates at 4.5%

By Anthony B. Sanders

Mortgage Refi Applications Deader Than A Norwegian Blue

Finally, the US Treasury 10-year yield has pierced the 3% barrier and NOT immediately dropped back. The 10-year yield stands at 3.03%.

yieldpiercer

How about the 30-year mortgage average? The Bankrate 30Y mortgage average rate is now 4.50%.

Continue reading US Treasury 10Y Yield Pierces 3% Barrier, 30Y Mortgage Rates at 4.5%

Liquidating Civilization, Report 22 Apr 2018

By Keith Weiner

Further to our ongoing theme of capital destruction, let’s look at a topic which is currently out of favor in the present market correction. Keynes called for pushing the interest rate down near to zero, as a way of killing the savers, whom be believed are functionless parasites. The interest rate has been falling since 1981.

It did not merely fall near to zero. Nor even to zero. It has gone beyond zero, into negativeland. This alone ought to wipe out the mainstream notions of how interest rates are set in our very model of a modern monetary system. You know, the rubbish about bond vigilantes, inflation expectations, real interest rates, risk, etc. Might as well add unicorns, dragons, and leprechauns!

Instead of this rubbish, the world needs a non-linear theory of interest and prices in irredeemable currency.

In recent years, rates have plunged below zero in Switzerland, Germany, Japan, and other countries. Despite the current global uptick in rates, all Swiss government bonds out to 8-year maturity have a negative yield. Hey, at least that’s a recovery from when the 20-year had a negative yield. In Germany, bunds out to 5 years are negative, as they are in Japan.

This is pathological (in fact, due to negative long bond yields in Switzerland, Keith wrote a paper arguing that the Swiss franc will collapse).

As an aside, we note that when people hear our arguments, they go through a process akin to the well-known stages of grief. These include denial, anger, bargaining, and then finally acceptance and hope. It is much easier to think about rising quantity of dollars, and the presumed linear effect of rising consumer prices. And more pleasant, too.

Continue reading Liquidating Civilization, Report 22 Apr 2018

How Do Changes in Real Interest Rates Affect Gold?

By Charlie Bilello

We often hear that Gold prices are driven by real interest rates. Rising real interest rates are said to be bad for Gold because it increases the opportunity cost of holding the yellow metal. This makes sense intuitively as Gold pays no interest or dividend, and will therefore be less attractive as compared to risk-free bonds when real interest rates are higher.

But Gold is a complex animal, influenced by a multitude of factors, only one of which is real interest rates. How much do changes in real interest rates alone impact the the price of Gold? And is it only the change in real interest rates that’s important or the absolute level as well? Let’s take a look…

Since 1975 (when Gold futures began trading), there has been an inverse relationship between Gold and real interest rates. Gold has generated positive returns during periods of falling real interest rates and negative returns during periods of rising real interest rates.  This is true whether we look at monthly changes (+13.9%/-3.9% during falling/rising periods) in real interest rates or year-over-year changes (+11.0%/-0.3% during falling/rising periods).

Continue reading How Do Changes in Real Interest Rates Affect Gold?