“Now if there’s a smile on my face
It’s only there trying to fool the public”. “The Tears of a Clown”, a song by Smokey Robinson
and the Miracles
CONCLUSION AND OVERVIEW
The United States Treasury 10 year note yield probably will continue to travel sideways for the near term.
In America and many other key countries around the globe, uncertainties and risks regarding numerous entangled economic and political variables and marketplaces remain substantial. In particular, inflationary and recessionary (deflationary) forces battle for supremacy.
Monetary tightening by the Federal Reserve Board and its central banking allies has helped to cut lofty consumer price inflation levels. However, significant inflation persists in America. Both headline and core (excluding food and energy) inflation float well above targets aimed at by these guardians. Price indices for United States personal consumption expenditures services for the past several months have remained high. Yet in comparison with actual consumer price inflation, inflationary expectations for longer run time spans have remained moderate. Unemployment in the US remains low, assisting consumer confidence and thus household spending, thereby tending to keep interest rate yields relatively high. Given the Russian/Ukraine conflict and OPEC+ willingness to support prices, how probable is it that petroleum and other commodity prices will ascend again?
America’s recent resolution of the heated battle over raising the debt ceiling avoided default. However, despite celebratory talk by many about how that new legislation displayed fiscal responsibility, the new law accomplished very little in substance toward reducing the towering public debt challenges confronting America. The massive and increasing public (and overall) debt in the United States (and many other leading countries) signal the eventual arrival of even higher interest rates.
Higher interest rates have diminished worldwide GDP growth prospects and boosted recessionary fears. History indicates that a negatively sloped US Treasury yield curve (short term rates higher than long term ones), such as has existed in America for over six months, portends a recession. Though history need not repeat itself, either entirely or even partly, significant disinflations induced by monetary policy tightening connect with recessions. But central bankers, Wall Street, Main Street, and politicians do not want a severe recession or a substantial fall in the S+P 500 and will strive to avoid those eventualities. The shocking banking collapses a few months ago in America and Europe seem largely forgotten. However, they warn of dangerous fragilities facing banking systems and diverse marketplace arenas, especially if US rates resume their ascent or price feebleness in commercial real estate assets becomes even more worrisome. The United States dollar, the leading international reserve currency, has depreciated from its major high milepost reached in autumn 2022 but arguably remains “very strong”. This robustness helps to make US Treasuries (and other dollar-denominated assets) relatively appealing to some overseas players. Prices of emerging marketplace stocks and interest rate instruments remain vulnerable to rising UST yields and
dollar strength. Also, even in an inflationary environment, fearful “flights to quality” (buying UST) sometimes emerge.
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US Treasury Yields, Fed Maneuvers, and Fiscal Games (6-5-23)