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Rising Bond Yields Point The Way To Economic Recovery

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http://www.independent.co.uk/news/business...ry-1703241.html

Government bond yields around the world are soaring as inflationary expectations rise and debt management agencies struggle to fund record peacetime fiscal deficits. Both in the US and the UK, 10-year yields are back above 4 per cent, a level not seen since October last year. This is a complete reversal of the situation of just three months ago, when to many it looked as if the world was about to be engulfed by deflation and a second Great Depression.

As if to demonstrate that there is always something left to worry about, a new concern has now come to dominate consensus thinking – that rising bond yields threaten to derail the still nascent economic recovery by raising mortgage and corporate lending rates too fast.

The fear is that faced with a buyers' strike and rising inflation, governments will be forced to raise interest rates to such an extent that it kills off all chance of economic revival. What's more, all that government borrowing may end up "crowding out" private credit and therefore prevent a wider economic renaissance.

Obviously these are dangers, but for the time being the better way of looking at rising government bond yields and a weakening dollar is as a positive, rather than a negative development. Far from marking the beginnings of a new crisis, in fact they are only indicative of a return to normality.

Why would I say such a thing? Is this not the end of the dollar hegemony that has for so long been predicted by the likes of Niall Ferguson, the economic historian? Are not rising yields a first sign that the Chinese are turning their backs on satisfying America's insatiable appetite for debt?

No empire lasts for ever and some of them, such as that of the Soviet Union, are dated in merely decades. America's age of geo-political dominance will likewise eventually fade and die, but perhaps not quite yet.

The reality of bond yields on both sides of the Atlantic is that though they have certainly risen to a striking degree – in the US, bond prices have virtually halved within the space of just four months – they remain remarkably low by historic standards.

Given the scale of the funding programme – the US alone is expected to raise more than $3trillion in new borrowings this year – the perhaps more noteworthy thing is quite how low they still are, rather than how high. The same can be said of Britain, where yields remain almost incredibly tame given that the country is about to clock up the largest ever peacetime deficit on record.

As I say, the yields we are seeing today are not so much an aberration as a return to normality. But certainly what's going on is a little counter-intuitive. It also raises questions about the efficacy of the policy response, how much of it is strictly necessary, and whether central banks might be provoked into a rather earlier exit strategy than previously thought.

Some policymakers want to make discussion of exit strategies, or how to withdraw the fiscal and monetary stimulus that has been provided, top of the agenda for this weekend's meeting of G8 finance ministers in Italy. To many this will look somewhat premature, with recovery far from established and unemployment still rising sharply, but certainly things seem to be moving in the right direction.

When the Bank of England announced its programme of Quantitative Easing (QE) a little while back, the idea was that by buying large quantities of gilts with newly minted money the Bank would push down gilt yields thereby persuading investors to chase higher yielding, riskier assets.

This in turn would help to get credit conditions and private sector activity functioning normally again. In fact, gilt yields have risen. What this shows is not that the policy has failed, but that we are arriving at the desired outcome by a rather different route.

One of the main reasons why bond yields are rising and the dollar is weakening is that investors are rediscovering their appetite for risk. Just as gilt yields have risen, corporate bond yields have eased somewhat. Equity prices have also been rising strongly. As investors turn their attention to riskier assets, the dollar, traditionally regarded as a safe haven in times of trouble, has suffered along with US Treasuries. None of this is great news for governments attempting to finance their ever growing debt mountains, but if the ultimate purpose of policy was to encourage investors back into riskier assets then it seems to be succeeding. Or perhaps it is occurring regardless of policy.

In markets, there is never any single explanation for anything. One of the other reasons for rising bond yields and the weakness of the dollar is rising inflationary expectations. This again is a complete reversal of the position that reigned just three months ago, when most were expecting outright price deflation.

Since then, the oil price has come racing back. Particularly in the US, there is a strong correlation between gas prices and people's inflationary expectations. Yet how realistic are these inflationary fears? Around the world, producer prices are still extraordinarily tame and in some countries falling fast. The recession has created massive spare capacity in nearly all economies. The threat of outright deflation may have been seen off, but by the same token it is still quite hard to see a serious inflationary problem re-emerging any time soon.

Rising bond yields may not be welcome to cash-strapped governments, but if all they amount to is more evidence of green shoots, are they really anything to worry about? At this stage, the answer has to be probably not. But Angela Merkel, the German Chancellor, has a point in raising the alarm about loose money. The idea that we could suddenly find ourselves in the midst of an inflationary mini-boom, or that we are only laying the foundations for another credit bubble, is not as far fetched as it might seem.

So govt debt becomes unsustainable is good news and sign of a recovery? :blink:

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So govt debt becomes unsustainable is good news and sign of a recovery? :blink:

you really couldn't make this stuff up could you.

did you hear the news on the west brom bs last night. They said the society has (can't remeber the figures tbh) 100 million of debt & can't pay it. The news reporter said something like 'that debt has now been turned into credit to solve the problem' :blink::blink:

I kid you not. :lol:

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To be honest this would solve all the problems.

:D

I assume you are being dry.

also,

debt IS credit in today's speak. The term 'credit' really annoy's me. They call it that so that you don't sound like you owe money. I mean think about it, years ago you got a credit note when you returned an item you had already paid for. Whereas now you borrow money which is now called 'credit'.

edited for clarity.

Edited by grumpy-old-man-returns

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:D

I assume you are being dry.

also,

debt IS credit in today's speak. The term 'credit' really annoy's me. They call it that so that you don't sound like you owe money. I mean think about it, years ago you got a credit note when you returned an item you had already paid for. Whereas now you borrow money which is now called 'credit'.

edited for clarity.

Its credit when you bank the funds - its debt when you've spent it.

Of course who takes out credit and doesn't quickly turn it into debt.

Another funny article.

Edited by gravity always wins

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To be honest this would solve all the problems.

I agree. The best thing would be for the government to simply go into our accounts and reverse credit into debt and debt into credit. All the numpties would be bailed out, and people like us who actually save could be relied upon to work the debt off. We are already having to bail out the feckless and greedy, so why not do into more openly?

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For me the rising bond levels are now the central thing to watch. I believe the US and UK economies will collapse without QE now. We can debate about why that is, but I think its obvious we'd be beyond just major pain without QE. Its why I don't buy the belt tightening argument, that we should buckle down and pay off our debts. If everyone buckles down that itself will bust the economy as their consumption dramatically falls in a death spiral.

So the only way to keep the game going is massive unbridled QE. On the Brown scale of £150 billion a year, although I have been arguing it should be over £300 billion a year. But if this money does start causing higher and higher levels of inflation it will have to be scaled back and interest rates will have to rise, as the real interest rates people are paying already is. And quite dramatically in the USA.

I think the fed needs to call the bond market, and buy 1 trillion$ worth of 10 year treasuries.

Perhaps the worst scenario is if the state is doing all this stimulus spending but it only goes to a few very rich people who don't spend it. The money desperately needs to get out to 'the masses' so they can get it circulating in their local economies.

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The pigmen will be told to crash the stockmarket and commodities mini-bubble in the Autumn. This will put a stop to bond yields rising :lol: .

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Long term debt is more sensitive to bond yields than to the base rate itself. Mortgages are long term debt. This is bear-positive. ;)

Also, a sign that QE is failing - it was supposed to bolster bond prices and so bring down the yield and hence long term interest rates.

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For me the rising bond levels are now the central thing to watch. I believe the US and UK economies will collapse without QE now. We can debate about why that is, but I think its obvious we'd be beyond just major pain without QE. Its why I don't buy the belt tightening argument, that we should buckle down and pay off our debts. If everyone buckles down that itself will bust the economy as their consumption dramatically falls in a death spiral.

So the only way to keep the game going is massive unbridled QE. On the Brown scale of £150 billion a year, although I have been arguing it should be over £300 billion a year. But if this money does start causing higher and higher levels of inflation it will have to be scaled back and interest rates will have to rise, as the real interest rates people are paying already is. And quite dramatically in the USA.

I think the fed needs to call the bond market, and buy 1 trillion$ worth of 10 year treasuries.

Perhaps the worst scenario is if the state is doing all this stimulus spending but it only goes to a few very rich people who don't spend it. The money desperately needs to get out to 'the masses' so they can get it circulating in their local economies.

Which points back to the age old way of inflating your way out of debt is probably thr route we will follow...

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> Which points back to the age old way of inflating your way out of debt is probably thr route we will follow...

Except that the commodity market will soar and the $ will tank, which will cause even more collapse.

There really is no way out other than defaulting on the debt and starting over again.

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So with wages plummeting does this mean we will soon have 150% loan to value and 20x income mortgages?

I just can't see it.

The UK banks remained capital constrained and funding remains tight. New lending has to be funded and right now the redemption rate on outstanding loans has plummetted to exceeding low levels; mortgage borrowers are stuck on SVR and commercial borrowers are having real problems rolling over loans given covenants are being breached all over the place.

An extended period with a very steep yield curve will help bank solvency eventually. But the QE money is going to end up invested in gilts held by banks -- the new liquidity regime requires much higher liquid asset holdings -- with the proceeds spent on the automatic stabilisers (i.e. unemployment benefits) and interest costs; quoting GB himself " the costs of failure".

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I agree. The best thing would be for the government to simply go into our accounts and reverse credit into debt and debt into credit. All the numpties would be bailed out, and people like us who actually save could be relied upon to work the debt off. We are already having to bail out the feckless and greedy, so why not do into more openly?

This is a great idea! Even more radical and brilliant than the concept of negative nominal interest rates, as explored recently by another leading economic theorist: [article one] [article two]. Monetary authorities now have a formidable arsenal of tools they can use to extirpate the cancer of savings from our economy, and return the economy to its previous robust health!

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I just can't see it.

The UK banks remained capital constrained and funding remains tight. New lending has to be funded and right now the redemption rate on outstanding loans has plummetted to exceeding low levels; mortgage borrowers are stuck on SVR and commercial borrowers are having real problems rolling over loans given covenants are being breached all over the place.

An extended period with a very steep yield curve will help bank solvency eventually. But the QE money is going to end up invested in gilts held by banks -- the new liquidity regime requires much higher liquid asset holdings -- with the proceeds spent on the automatic stabilisers (i.e. unemployment benefits) and interest costs; quoting GB himself " the costs of failure".

Banks don't need to get funding from elsewhere to make new loans, they can issue fictional credit out of thin air which must be repaid to the bank plus interest. This is known as something called Fractional-reserve banking which has existed in the Uk for at least a couple of centuries.

As far as rising yields are concerned, increased borrowing costs will force the Government to borrow even more to pay off the interest. The extra borrowing in turn causes yet more inflation and yields rise again, inducing more borrowing.

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Banks don't need to get funding from elsewhere to make new loans, they can issue fictional credit out of thin air which must be repaid to the bank plus interest. This is known as something called Fractional-reserve banking which has existed in the Uk for at least a couple of centuries.

As far as rising yields are concerned, increased borrowing costs will force the Government to borrow even more to pay off the interest. The extra borrowing in turn causes yet more inflation and yields rise again, inducing more borrowing.

It's not as easy as that, they need capital first. Unless of course they simply create fictional capital as well but I'm sure the regulators would never agree to that.

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Obviously these are dangers, but for the time being the better way of looking at rising government bond yields and a weakening dollar is as a positive, rather than a negative development. Far from marking the beginnings of a new crisis, in fact they are only indicative of a return to normality.

Hmmm..... now where have I heard the phrase "return to normal" before?

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It's not as easy as that, they need capital first. Unless of course they simply create fictional capital as well but I'm sure the regulators would never agree to that.

Sure, they aren't allowed to create any more out of the magician's hat unless they have sufficient capital, something like 4% I think. But this was only ever a retrospective measure designed to add an air of respectability, a smokescreen.

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