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US Treasury 10-year rates leap to 20-year highs near 5%. NZ bond yields jump to 2010 levels

Bonds / analysis
US Treasury 10-year rates leap to 20-year highs near 5%. NZ bond yields jump to 2010 levels
flames

Parts of the world are in flames (Ukraine, Gaza, and now the wider Middle East).

Other parts are rising economically (India, Japan, the US, and more recently China).

Across most of the world labour markets are tight (everywhere).

The combination is lowering confidence that inflation is under control.

Financial markets have been slow to react. Market volatility is relatively restrained. Earnings are generally strong. Commodity prices are rising slower than consumer inflation. Wages are generally rising faster than inflation. All these things are ignoring the sudden rise of the flames.

But now the bond market is catching on.

Today (Thursday), benchmark bond rates have risen globally. In the US they have shot up to 20 year highs. The 10-year US Treasury yield is now almost at 5%, currently at 4.93%. That's up an amazing 37 basis points (bps) since the start of October. This week alone it has risen 33 bps.

In New Zealand, the NZ Government Bond 10-year yield has just hit 5.66%. That is up 23 bps this week alone (since the election). There is a Treasury bond tender this afternoon. Investors are sure to want a big premium.

Both benchmarks will probably be different by the time you read this.

Local wholesale swap rates are also likely to rise sharply today in the shadow of all these flames.

Equity markets are recoiling today. Wall Street was down -1.3% in a sell-off (Tesla's profit drop didn't help). The NZX50 is down -0.6% so far today. The ASX200 is down -1.5%. Eyes are now on Tokyo, Hong Kong and Shanghai.

So far, commodity prices haven't reacted in an outsized way any more than when we reported them this morning. Gold remains low, especially on an inflation-adjusted basis. Oil prices are very low on an inflation-adjusted basis even if they have risen recently. It helps that most nations' oil intensity is falling. (Crypto prices aren't reflecting geopolitical risks either).

It is a holiday weekend in New Zealand. But the world won't stop. You can stay updated on the economic consequences for all this uncertainty at interest.co.nz.

Buckle in. And watch for those swap rate updates at 5pm tonight.

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42 Comments

New t-shirt - Higher and harder forever!

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9

Got that printed on my underwear.

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4

Printed or spattered? That might depend on the value of the mortgage

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HAHFL.. Added to the list 

Does anyone even remember FOMO..

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Fear Of Massive Overhang

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Indeed. It could add up to the tipping point back to reality. Which is the counterpunch to the debt leverage to the moon model we have now. Stocks in the US, housing in China, pacific rim property, are all leveraged for speculativegain, and ignore income as a metric of value. 

What will be the straw that breaks the asset bubbles back?

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Absolutely love this short, sharp and honest summary. If you ever needed a reason to support interest.co, here is a good one. 

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22

Agree, and we’ll put.  How about a few more people get a green tick to help them along…

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What a wacky world we live in. Markets are betting on what central banks will do over the next ten years in response to unrest, higher costs of production (and resultant higher prices), and too many people having jobs! The traders appear to be following wisdom of the crowd theory, or, at least, deciding that they won't get fired for making the same bet their rivals are making.

The higher bond yields do of course mean that pension funds and other investors will be sat on bonds that are worth a lot less than they paid for them. How long before we are back doing QE? Noting that Govts that sold a $100M bond a couple of years ago could spend $75M buying / cancelling that debt today. Seems like a sweet deal to me. 

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The challenge to forecast when a flare up happens is immense. The consequences in Gaza and Israel can extend from "6 month military operation" to "thermo-nuclear war and the M.E turning to glass".

Ones an inflationary blip, and the other potentially makes the economy and money worthless.

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5

Our money was always worthless except for our belief and trust that it had value.

The subjective value is in the item being purchased not the tokens. There's a big difference between inherent, intrinsic and extrinsic values too, and much of its emotional over utility. Value has been highly distorted hence "value for money" is the dominant narrative. The value of the item, the person is significantly lost. It's all about price not value and that highlights a significant psychological/emotional issue around money and worth.

The ruling class have always known that money is ultimately worthless hence the storing of it in "assets"? Money is not a store of value.

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It's fine so long as you value it as a medium of exchange.

But yes, for most of us, it's really an extension of being a railway worker and being paid in railway dollars, which can only be used in the general store and bar, which are situated in the railway compound.

The alternative though is living in the wild.

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Would you care to purchase some moon coins? There are only 100 of them, they are priced in railway dollars, and there's no supported method of exchange within the railway. BUT, you can sell them back to railway workers at a higher price tomorrow. Or lower price, who knows. They are priced to railway dollars ONLY. Not priced to assets, productivity or hourly rate, but rather a simple calculation of (how many participating railway dollars/how many moon coins). BTW half of them are already hoarded and will never be sold, but don't worry about that.

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Sounds like I can't lose, sign me up!

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Why would they buy at 75m unless they find cheaper funds than coupon then it makes sense to hold to maturity 

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The 2 year and longer rates are going to go higher than floating rates very soon. And floating rates are going to stay around 8.5%.  Higher for longer everyone !

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TSLA earnings call was a DISASTER, Elon sounded suicidal!  I was expecting a nice bounce tomorrow but goodness knows now...

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Just finished reading the Musk biography by Walter Isaacson. Would definitely recommend it - Isaacson is a great writer.

Musk is an extremely complex character and there is a lot going on behind the scenes. If he is suicidal it wouldn’t surprise me - sounds like he has had a number of periods of deep depression recently (coupled with bi-polar mood swings). 

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It's an interesting one isn't it? Recently watched a Joe Rogan clip asking Musk about whether planes could be his next product. Elon admitted he'd thought about it but that his brain would explode, there's too much going on inside. He did not look fully with it. He's been outspoken about the dangers of AI yet fully committed to his neural link, which would just be the start of transhumanism. When asked if he would get it himself he hesitated big time, almost didn't want to answer.

He's definitely intelligent and also on some spectrum, but just as frail as any other human and subject to external narratives. He's almost held up as some sort of messiah.

Does bring up the questions around early childhood experiences, environment etc.

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His father was a psychopath that damaged him pretty badly (including having children with his step-daughter!). That and getting bullied at school (ending up in hospital for a week at one point).

Feel quite sorry for him after reading the book. Worlds richest man but his life sounds hellish.

His childhood trauma still has him very messed up and his friends have suggested he needs therapy but he won't go as he says he's got concrete walls put up around all of the emotional damage he's carrying with him.

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Those who push through harder upbringings are often the most motivated to better themselves from their experiences, although these never leave them.

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More recent understanding in the area of childhood emotional trauma suggests that a hyper commitment to ones work is simply a coping mechanism. If not healed, if not addressed those developmental issues will continue to affect them and others. Most of it will show up in relationships of all types and the inability to truly connect with others. It'll eat away internally affecting the body and the mind.

I believe most humans are somewhere on the spectrum of emotional trauma or childhood development issues, the "ruling" class more so and especially men. Wars, violence, control and power issues, hyper competitiveness, the over financialised world, the over sexualisation of women, data driven logic, all point to an unhealthy, unbalanced masculine. The "facts over feelings" highlights a lack of emotional intelligence. 

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The convalent forces are really beyond comprehension, there's also inter-generational epigenetics. But ultimately we are running hardware designed for a totally different existence. This gets exploited by what we have now, a limbic economy that's there to exploit all your primal desires, have you craving a dopamine rush, whether it's that new purchase, next negative social media post, drugs, you name it.

Society in general is now ruled by high levels of tension and anxiety, making people sicker, less empathetic, and seeking refuge in the short term.

Good news is free will is probably non existent and each person has the ability to alter their nature, should they have the will and tools.

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You’re quite thoughtful!

 

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What we are and how we work is something that should be a subject from young, and integrated into how we are raised/taught.

We have an increasingly sound picture of this verified by science, but really it's just reiterating much of what ancient wisdom can already tell us.

Big industry already knows this and can exploit it for profit.

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Now if only this understanding could be emphasised in the educational system to allow children with parents having lack of knowledge in the area to have the bets chance of understanding themselves from an earlier age and be less likely to fall prey to the swirling masses of exploitative industry you speak of.

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Kinda tricky. There's a framework we can all learn, which needs to be married to experience, and modern lived experience is a very hard place to cultivate a decent presence of mind. This is also impacted by age, the ego develops out of necessity from around 2-3 and requires a level of maturation before being able to effectively deploy this understanding.

This is something I've been at for coming up 20 years, and I still suck at it.

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I hear ya. It's a trippy journey for those willing to follow it. Thank you for sharing.

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Arnold's new book reflects that. It broke his brother, but made him thrive. But he seems far less damaged than Elon.

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Evidence that even higher wholesale rates (globally) eventually influencing fixed borrowing rates and TD's (locally) is becoming increasingly difficult to dispute with each passing day. 

More preparation - less criticism. 

 

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So you're saying all these central bank interventions to keep i-rates high are going to cause something to break?

I'd agree. They always do.

Hence why I believe this HFL nonsense is complete rubbish.

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The NZD tumbling if this continues inflation will back up over 6% by next year. People will be refinancing the million dollar mortgage at 9% soon, house price down 20% so far the next 20% will happen much quicker.

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Confused why anyone thinks a spike in 10-year bond yields is a sign of 'higher for longer'. We saw similar spikes in 1991, 1993, 2008 (vintage years all) - swiftly followed by 200 point drops.

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There is speculation that this is the end of a 30 year debt supercycle, and the reversion to mean, and true pricing of yield vs risk may take a while.

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I'm not looking at the 'spike' Jfoe - I'm taking the US 10 year chart and dragging the timescale out to maximum history and viewing the macro trend.

It is more the breakout of the last 40 year downward trend that has been thinking rates are going to be persistently high - but that doesn't mean I don't think they will fall when recession hits - I think they will - but I don't think we're going back to what we've just experienced.

https://fred.stlouisfed.org/series/DGS10

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That's what I was trying to say :-)

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Yip - increasing the risk free rate for investors could be a massive paradigm shift for risky assets and leveraged assets.

As Buffet put it, interest is like gravity. And its like we've been going orbital/out of the atmosphere the last decade with almost no interest at all. i.e. as rates approached 0%.

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Yep. Time for orbital re-entry. Hope the leveraged packed their heat shielding.

Extra crispy popcorn...

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What if one of them's the farmer growing the corn?

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It's interesting to look at - and you're right in that visual analysis, each peak lower than the last, each trough lower than the last. Until now. This is now sitting at a point higher than it has been since before the GFC. I too think rates will fall with recession, it seems like a no brainer, but where will they bounce? Will they trend down again, or pull up?

I'm no expert at these things, my entire life TDs and bonds have had meager returns compared to other asset classes. Suddenly they're in favour, fascinating.

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Fair enough. I might lack imagination or knowledge, but I simply cannot work out how post-GFC levels of private debt are compatible with higher for longer rates. We also have investors sat on massive losses on Govt bonds, which they bought as rock solid safe assets. Let's check back in a few months!

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There's some practical realities to setting debt precedences.

I remember getting business loans at 15%. That requires a much different margin structure, compared to it being half that (or even less if someone is borrowing against property to fund their business).

And some businesses are going to have capital investments to produce far more product than they've budgeted for.

Some entities have to fall over, eventually. PLUS, we have all these no-profit mega companies with super high share values that investors are going to run out of appetite for.

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