History offers us valuable lessons. During the week, I read an interesting Bloomberg article citing research from financial historian Paul Schmelzing. He explained at a Jefferies (Hong Kong) forum that it’s effectively impossible for data from recent decades to offer insight into whether there’ll be a lasting impact on borrowing costs from the pandemic. This is interesting as the popular narrative is rates will remain high for a very long time…. but will they?
"Interest Rates / Bonds"
Where Do We Go From Here?
Major averages pulled back this week on fears rates could remain higher for longer. Makes sense – with the US 10-year above 4.25% – that’s a reasonable assumption. But here’s the thing: get used to it. Whilst rates might feel ‘tighter’… rates are still not historically high. Not even close. What was not normal was rates being artificially suppressed to near zero for 15 years. And that might prove to be a difficult adjustment for some people. So where to from here? The honest answer is none of us know. What follows are some of the assumptions being made; and perhaps gaps in the market’s thinking… it starts by asking quality questions.
“Navigating by the Stars Under Cloudy Skies”
Today Fed Chair Jay Powell offered his latest sentiment on the economy and monetary policy from the Jackson Hole Summit. Whilst he leant hawkish (my expectation) – he also admitted he doesn’t know what’s ahead. Nothing wrong with that… better decision making starts by first recognizing what we don’t (or can’t) know. Powell stated “… as is often the case, we are navigating by the stars under cloudy skies”. Question is – what does that mean for markets and rates ahead?
Beware the “Bear Steepening” of the Curve
My last post talked about how the market is now taking its cues from bond yields (less so the Fed) Don’t get me wrong… what the Fed does (or says) matters. We will hear more from Chair Jay Powell at the end of the week. Expect hawkish tones. To recap on what I shared earlier this week – globally long-term bond yields trade at their highest levels in 15 years. However, what’s interesting is the shorter-end (e.g. 2-year and below) is not keeping pace. This has net the effect of “steepening” the all-important 10/2 yield curve. Question is – will that be a problem? History may offer some clues.
For a full list of posts from 2017…