A lot of the developed world has negative interest rates…a record $11.7 trillion in bonds according to the Financial Times. To put this amount into perspective, the total amount of bonds yielding over 2% is $2 trillion.
Domestically, long dated Treasury yields are approaching record lows. Real yields—which factor in inflation—have been at a record low for the longest stretch in history. Depending upon the inflation statistic utilized, the 10-year has a negative yield of 0.8% to 1.1%.
The last time negative real yields were this low, the Treasury market was crushed.
In my view the reason for these negative yields is massive central bank easing that has injected gargantuan amounts of liquidity into the financial system.
In the US alone there is over $2.5 trillion in excess bank reserves. Historically there is only $1 billion in excess reserves according to Federal Reserve data.
In many regards the “natural order” has been crushed, equivalent to “cats chasing dogs” and “the canary eating the cat.” When will the “natural order” revert?
I think the Treasury market is more overvalued than the NASDAQ was in March 2000 when everything was priced PWE or Priced Beyond one’s most Wildest Expectations. The mantra was we have entered the New Paradigm and the business cycle was dead and NASDAQ 10000 was almost a certainty. As all know, the NASDAQ was crushed over 70% in about 18 months.
I can cite a gazillion reports as to why yields will remain at current levels, reports sounding as authoritive as Donald Trump having only a 5% chance of becoming the nominee, Hillary Clinton will be coroneted by February and oil will remain under $30 barrel. Incidentally the above reports were written less than six months ago.
There is going to be some externality that shatters the illusion yields will never go up. Can it be growth stronger than expected? What about stronger than expected inflationary expectations generated by the rise in oil or in home values that greatly impacts OER? What about stronger than expected wage inflation ushering in destructive cost-push inflation?
Speaking of wages, this week can be of significance. The four day week is filled with top tier data points including June’s BLS labor report.
Commenting briefly about Friday’s activity, all markets were quiet leading into the three day weekend.
Last night the foreign markets were mixed. London was up 0.40%, Paris down 1.31% and Frankfurt down 1.42%. China was up 0.60%, Japan down 0.67%and Hang Sang down 1.46%.
The Dow should open moderately on global growth fears. The 10-year is up 16/32 to yield 1.39%.
