![kings and thrones kings and thrones](https://quotestats.com/topic/263830-quotes-about-kings-and-thrones-1650763.jpg)
Ten-year Treasuries morphed into the “risk” asset category several years ago. The Fed cannot for long continue to maintain current policy rates and expand its own balance sheet and therefore private bank reserves at a $120bn monthly pace. At some point in the next few months, hopes for this will probably be disappointed as inflationary pressures pose increasing price risks to Treasuries and stocks too. Such speculations, however, are dependent upon the stability of the dollar and the consistency of Powell’s vow to keep short rates unchanged for the foreseeable future. No wonder the 10-year Treasury rests illegitimately at 1.65 per cent.
![kings and thrones kings and thrones](http://blog.ricksteves.com/wp-content/uploads/2017/07/dark-hedges-game-of-thrones-bregagh-road-kingsroad-westeros-northern-ireland-640x427.jpg)
And then there’s the Fed buying more than $1tn Treasuries a year. Part of the explanation lies with the less attractive yield on local sovereign debt for foreign institutions (minus 0.5 per cent in Germany, for instance).Įven US investors, however, believe that a 10-year Treasury yielding 1.65 per cent can earn a total return of 2.40 per cent or more by capturing the rising price of the bond as it approaches its maturity date. Five-year US inflation protected bonds now trade at a yield close to minus 2 per cent. That is reflected in the negative real yields, which have the effects of inflation stripped out. Many observers wonder how Treasuries and other global sovereigns can trade at yields that are so low, and in some cases negative.įive-year US Treasuries currently yield just 0.80 per cent, not much in a world where inflation expectations over the same period are above 2.5 per cent. And how long can the Treasury continue to require near-costless Fed financing for $2tn, $3tn and $4tn deficits without sinking the dollar? In a historical gold-standard world, Fort Knox would have been emptied long ago, implying the bankruptcy of the world’s reserve currency. What is Powell’s new Nairu? The Fed’s historical model for the “non-accelerating inflation rate of unemployment” cannot be a reliable guide for future policy rate changes. Yet unemployment may never return to 4 per cent, given the radical changes in working from home and Zoom-like technological shifts. Powell will not even acknowledge asking the question about asking the question until Covid is more under control and employment returns to historical norms. I suspect that $5tn spending programmes and the Fed’s current package of near zero per cent short-term rates and $120bn of monthly bond buying will move growth, inflation and financial markets far beyond reasonable targets that ultimately will jeopardise post-Covid-19 normals.Įven enthusiasts of the Fed’s policy must wonder whether hundreds of cryptocurrencies or a boom in special purpose acquisition vehicles are the result of continuing financial innovation or the product of cheap and plentiful credit demanded by deficit spending and an accommodating Fed chair. Still, how does Powell (and Washington) get there, and for how long do they keep their “pedal to the metal”? That these fiscal and monetary monarchs have logical intentions is not in doubt - a return to a pre-coronavirus economy of 3 per cent real growth and 2 per cent inflation is their goal. Granted, he is conjoined now more than ever with the Treasury and forced to accommodate peacetime deficits of unimaginable size. The Fed chair with the ammunition of the global currency has been sitting on the monetary throne for the past 50 years.Īnd now it is Jay Powell - well meaning I’m sure, but bombarded with unique pandemic-related circumstances that make me wonder whether he has changed his conservative clothes and unleashed the potential for chaotic future economic and market outcomes. There never has been an investor that could move bond markets with a large enough wallet to make a difference.