The last couple of weeks or so have seen a turn in bond yields. Perhaps the clearest example of the change has been that the US ten-year yield is approaching 4% this morning ( 3.95%). The move in shorter-dated yields is even more noticeable with the US two-year having reached 4.7%. There has been quite a change in perception as CNBC summarises below.
Recent comments from Fed officials have stoked fears of even tighter monetary policy going forward. Last week, St. Louis Fed President James Bullard said he advocated for a 50 basis point increase at the Jan. 31-Feb. 1 meeting. Back then, the central bank hiked rates by 25 basis points.
As of Tuesday, traders saw a 76% chance of the Fed raising rates by 50 basis points in March, according to the CME Group’s FedWatch tool.
Indeed Kelly Evans of CNBC has really picked up that particular ball and run with it.
do we actually need a whole lot more tightening to get us to that outcome? And is that what the yield curve has been telling us.
While we’ve already had the sharpest, fastest tightening cycle in history, some would argue rates should be doublewhere they are right now. I’ve seen a few different “Taylor rule” formulations lately suggesting rates actually need to be at 9-10%, not the 4.6ish percent we are at right now.
There are various issues with that of which the first is that if the Federal Reserve was following any sort of Taylor Rule, or indeed past views that interest-rates needed to be higher than expected inflation, then interest-rates would be much higher already. Also it is not entirely helpful to be pushing for higher yields after what is a pretty big move as the two-year yield was 4.06% on the 2nd of this month.
Actually if we go even shorter we can fire our 5% Klaxon
Yields on 6-month T-bills are climbing to new post-2007 highs. pic.twitter.com/bs4NOwtwdX
— Lisa Abramowicz (@lisaabramowicz1) February 22, 2023
Reserve Bank of New Zealand
Some of the pressure being created is coming from other central banks.
The Monetary Policy Committee today increased the Official Cash Rate (OCR) from 4.25% to 4.75%.
The Committee agreed that the OCR still needs to increase, as indicated in the November Statement, to ensure inflation returns to within its target range over the medium term.
Whilst the interest-rate us in essence in line with the US there are two additional factors. The first is that this was a 0.5% rise and the second is the rhetoric about “More! More! More!”
Central bankers have in my view got themselves into rather a pickle as this from the RBNZ highlights.
Although CPI inflation was slightly lower than expected in the December 2022 quarter, the starting point for economic activity was stronger.
Having ignored rising inflation calling it “Transitory” they are now ignoring improving trends and if anything ramping up the rhetoric.
Euro Area
This morning the Financial Times has been on the case.
Investors are betting the European Central Bank will raise interest rates to all-time highs, spurred on by the eurozone economy’s resilience and signs that inflation could prove tougher to rein in than expected.
Regular readers will be aware that in my financial lexicon for these times official use of the word “resilience” is frequently followed by a collapse. Something reinforced bu words from the woman who told us early last year that inflation would merely be a “hump”
ECB’S PRESIDENT LAGARDE: IN 2023, THERE WILL BE NO EUROZONE COUNTRIES IN RECESSION. ( @financialjuice )
So where are interest-rates expected to go now?
Swap markets are pricing in a jump in the ECB’s deposit rate to 3.75 per cent by September, up from the current 2.5 per cent. That would match the benchmark’s 2001 peak, when the ECB was still trying to shore up the value of the newly launched euro. ( FT)
The twisting and turning on inflation is really rather extraordinary as the FT tells us this.
“There is a risk that inflation proves to be more persistent than is currently priced by financial markets,” Isabel Schnabel, an ECB executive board member, told Bloomberg this week.
Some might think that this from February 9th last year is relevant.
Transitory supply shocks drive inflation and growth in opposite directions. That’s why central banks can usually look through their impact on inflation, both for upside and downside deviations from target. Our target is symmetric.
So Isabel Schnabel seems to be trying to catch-up on her past mistakes which is likely to lead to yet another mistake. Speaking of mistakes how much more wrong could relying on core inflation have been in an energy crisis?
Although eurozone inflation has fallen for three consecutive months, core inflation — stripping out energy and food prices to show underlying price pressures — was unchanged at a record 5.2 per cent in January.
We know that into the summer and autumn energy prices are looking a lot lower. Also after last year’s real wage falls this looks rather ghoulish from the ECB.
ECB president Christine Lagarde said on Tuesday that the bank was “looking at wages and negotiated wages very, very closely” — an indication of concern a sharp rise in salaries this year will maintain pressure on prices as companies pass costs on to consumers.
That is quite a mess as they make people worse off as part of their enormous Covid inspired effort to make them better off! It is disappointing that few if any other places than me make this point.
Martin Arnold of the Financial Times must have realised how embarrassing this is so made himself feel better with a gratuitous dig at the UK.
While UK inflation remains in double digits, it has fallen faster than expected and the country’s anaemic growth outlook has diminished pressure on the Bank of England to increase rates.
It was a rather good effort to write that just after the release of data that made UK prospects look better…..
The UK
Things have changed here too with the UK ten-year yield nudging 3.7% this morning. Also the two-year yield has reached 4% albeit only briefly so far. This is all very different to post the Bank of England announcement when the ten-year yield fell below 3% towards 2.9%.
Comment
The mood music has clearly changed on interest-rates and bond yields and let me now switch to the consequences. One clear one comes from my home country the UK where a two-year yield of around 4% and a five-year of 3.64% suggest higher fixed-rate mortgages are in prospect. Those who follow my twitter feed will know I was suggesting there were some cheaper offers likely as the five-year was around 3% which happened. But now the reverse is true and that means prospects are for larger falls in house prices. As you can see from Mortgage Rates US that is an international trend.
Mortgage Rates Surging Back Toward 7% 30 Yr. Fixed: 6.87% (+0.07% ▲) | 15 Yr. Fixed: 6.07% (+0.12% ▲) |
Financial conditions more generally will have tightened as businesses and governments find it more expensive to borrow. So the economic prospects which have recently looked brighter will see some clouds. So a lot going on although the Wall Street Journal concentrates on the subject closest to its heart.
Rising Bond Yields Rattle 2023 Stock Rally The 10-year Treasury yield has surged higher, erasing an element of support for U.S. share indexes.
Anyway for a lighter moment here is how Martin Arnold of the Financial Times confesses that his favourite experts have just been wrong-footed again.
Resilient economic data across advanced economies this month has led economists and financial experts to bet that interest rates will stay higher for longer than they previously considered.