Where will bond yields top out?

[Spekulatius]

8 hours ago, Gregmal said:

Is there a point where there is just a reset on the economic fronts? We had zilch of this precovid. So has Japan with 0 rates. The COVID responses across the world, fucked all this up. The supply chain, one by one, will correct. So while I’m open to what you’re saying, isn’t it much more likely that eventually Ford produces enough cars that the days of bidding wars and capital gains on vehicles is over permanently? Same with lumber, steel, and whatever other widgets are currently or recently an issue? Supply chains get congested, as COVID continued to be on again off again it got worse. So if we re past COVID crap, don’t they eventually normalize to precovid? 

 

This is basically the inflation is transitory argument that got pretty weak in late 2021, I think. I cant go into detail but in my job, I am seeing cost increases in the order of 10% pretty much across the board, give or take. The firm I am working for is also increasing pricing by similar magnitude starting late. 2021. Something like this has never happened before, even during the boom time in 1999. These are blanked increases and there is very little to no push back, which is pretty much unheard of.

 

This all looks like inflation really got rolling and starts to feeds on itself, these are not “supply chain ripples” any more than will go away by itself. I think the inflation is just about everywhere and thats why the Fed is putting the break on the pedal finally and will reduce demand via increased interest rates to slow down the economy. Its the only way, because we are unable to increase the supply apparently.

Edited June 16, 2022 by Spekulatius

[Viking]

Is inflation transitory? I think most people today would say no. The US has experienced an average inflation rate of 7% over the past 12 months. THAT IS IN THE BAG. So very high inflation has been happening for a long time already. The print for May was 8.6%. And it is expected the rate the next couple of months will come in at around 8%. 
 

So the question then becomes what will cause 8% to fall dramatically? Shelter is the biggest component of CPI at about 1/3. The US has a severe housing shortage; both house prices and rents are increasing at double digit rates. Who thinks shelter costs as measured in CPI are coming down any time soon? I think we can all agree that 1/3 of CPI is going to continue to run hot. 

 

Energy is the next biggest component of CPI. Oil prices did not spike to over $100 until March/April so this impact on CPI will not be calendarizing for another 9 months. Yikes! Oil is also a super important input into the general economy as an input into something else; these impacts hit CPI with more of a lag (as it takes time for manufacturers to first experience the cost and then decide what to do, negotiate with customers, confirm on an increase amount and effective date - this process takes months). So the knock on effects of +$100 oil prices are likely just showing up in CPI. And if oil pops higher ($150 or higher) in the coming months? Think Groundhog Day…
 

Food is the next biggest component of CPI. Food prices are through the roof (both retail and food service). The war in Ukraine has caused grain prices to spike. But that is not what is causing the high CPI today. The war happened a couple of months ago. The impact of the war in Ukraine on food prices will be felt in the year ahead. And inputs like super high fertilizer prices will take years to fully hit CPI (given all the lags from Mosaic to farmer to manufacturer to consumer). Guess what chickens, pigs, cows etc all have in common? They have to eat something to get big and fat (grains that need fertilizer). Due to the war in Ukraine high food prices look pretty much baked in the cake for the next 12-18 months at a minimum. 
 

Services is the biggest component of consumer spending (much larger than goods). Services inflation is JUST GETTING STARTED. People are flush with all the cash they have been pulling out of their house (MEW were through the roof in 2021) and want to spend it on vacations, restaurants etc. 
 

Wage inflation is just getting started - and also hits with a lag… employees experience high inflation and THEN DEMANDS BIG PAY RAISE. We are at the ‘demand big pay raise’ part of the inflation time line. Who thinks labour cost increases are going to come down in the coming months. LABOUR COST INCREASES ARE GOING TO LIKELY INCREASE BECAUSE EVERYONE KNOWS INFLATION IS RUNNING AT 8.6% (you can show your boss the news headline on your smart phone). Regardless, the US has a SEVERE labour shortage. TODAY.

 

I could go on and on… there are so many examples. And there are lags (the effects take months and months to play out). And the impacts affect EVERY ASPECT of life for a consumer or business. AND THEY KEEP HAPPENING OVER AND OVER AND OVER.
 

Key takeaway: INFLATION IS JUST GETTING STARTED. IT IS LIKE A SNOWBALL RUNNING DOWN A HILLL. IT JUST KEEPS GETTING BIGGER AND BIGGER. AND THE SNOW IS VERY STICKY RIGHT NOW - PERFECT FOR ROLLING A BIG SNOWBALL (covid, war, commodity super cycle, labour shortage, housing shortage).

 

The important point is: someone has to actually do something to stop the inflation ball once it gets started rolling. And that someone is the Fed. Except they are way, way behind the curve. Inflation is 8.6% and the Fed Funds rate is 1.5%. FED POLICY IS STILL HIGHLY ACCOMMODATIVE. Yes, QT started today. And rates in the bond market have popped higher. However, real bond rates are still big time negative (= accommodative). And it takes 6-12 months for higher rates to impact the actual economy…. 
 

What does all this mean? High inflation is likely here to stay - and higher and longer than people currently think. 

Edited June 16, 2022 by Viking

[Gregmal]

Weird. I was told days ago consensus was that inflation is now transitory but everyone and their mother keeps parroting that it’s here to stay…

[Viking]

Good thing Powell is all over this inflation thing just like his hero (Volker) was! I was worried for a second there…
—————

US Inflation Nearer 1980 Peak Than Thought, Summers Group Says

- https://www.bnnbloomberg.ca/us-inflation-nearer-1980-peak-than-thought-summers-group-says-1.1775062

 

US inflation is running even closer today to its 1980 peak, fresh analysis of historical price data shows, suggesting that the Federal Reserve’s task of bringing price gains back to its target is tougher than previously thought.

 

A group of economists including former Treasury Secretary Lawrence Summers recalculated historical readings for the consumer price index to apply modern-day spending patterns, especially for housing.

 

After adjustments, the figures showed that core inflation ran at an estimated 9.1% in June 1980 -- versus the reported peak of 13.6%, the paper by economists Marijn A. Bolhuis, Judd N. L. Cramer and Summers said.

 

That means that the aggressive monetary tightening that then-Fed Chair Paul Volcker implemented in the early 1980s brought the core inflation rate down by 5 percentage points -- not by the 11 points in the official annals. And that in turn suggests the Fed’s job today is of a scale closer than previously thought to Volcker’s -- which involved a deep recession.

 

In April, the core CPI rose 6.2%. Fed policy makers target a 2% inflation rate, although that’s tied to a separate gauge of prices that averages somewhat less than CPI. Economists forecast the May core CPI figure, due Friday from the Bureau of Labor Statistics, at 5.9%.

 

Volcker Scale  “To return to 2% core CPI inflation today will thus require nearly the same amount of disinflation as achieved under Chairman Volcker,” the researchers said in the paper published by the National Bureau of Economic Research.

[Viking]

37 minutes ago, Gregmal said:

Weird. I was told days ago consensus was that inflation is now transitory but everyone and their mother keeps parroting that it’s here to stay…

Consensus today (in financial markets) is that inflation IS largely transitory. The Fed still thinks this. Look at what they are doing (and not what they are saying). How slow they have responded. Fed funds was 0.75 to 1% yesterday. Only today did they move it to 1.5 to 1.75%. QT just started today. 

 

A few people on this board who think inflation will run hotter for longer (than expected) hardly qualify as everyone. And I do not think it is ‘here to stay’ forever - rather, it looks to me like inflation could stay elevated the next 12-18 months. After that, we will see. At some point the Fed will need to get serious.
—————

CPI is just a math equation. Help me understand what component will be coming down any time soon? Shelter? Energy? Food? Or are you thinking along the lines of something like  ‘immaculate conception’? That will bring it down?

Edited June 16, 2022 by Viking

[Gregmal]

The Fed is dragging its feet because they can not solve the problem with the tools at their disposal. Check out some of the more detailed analysis. Mr Inflation himself, Einhorn, “shoveling snow with an ice cream scooper”…Harris Kupperman absolutely nailed this but folks were too busy whining about what he thought of vaccines or that a stock he picked a while ago went down….

 

Literally every single person linked or quoted or YouTubed in most of these threads says the same thing. That is by definition “consensus”. What do they say? 
 

-recession

-more pain ahead

-rates going higher

-persistent inflation

-everyone is asleep at the wheel(while every sentiment reader or fear index is off the charts mind you!)

 

On to the issues you asked about…I can confidently say I probably have a better handle on residential real estate than 95% of people, the returns are there to prove it. The way rents work is they rise and then they roll. So they spiked late 2020 and last year, but then bc of renewal structure you have a nice 12-18 month figure goosing where you get all your rents up to market rate. Rental rates for the most part will start moderating big time in a couple months. Same with housing prices. Probably Q4.

 

Energy is gonna be a problem but the Fed largely ignores it and rightfully so. People get what they voted for. November will bring sentiment change.

 

Food? That too is tapering off although much lumpier. You can see it in a lot of the consumer product segments. The inflation happened last year. Some raised. Some held off and are now raising prices because last year they said transitory and now realize they’ve got to pass it along. CPB is a good example. If we want to harp on grains and wheat, sure. But again, food prices across the board jumped last year and are also leveling off they’re just influenced by big jumps in specific places.

 

But bottom line, something isn’t consensus if nobody thinks it, or if the majority of folks are saying the opposite. I mean 2 months ago the media starting having a field day with the “inflation crisis”. Every hedge fund guy doing an interview starting saying they were shorting the market. The Fed admitted they were wrong last year on transitory. The market sold off hard. Rates have gone up a bunch….but everyone is asleep at the wheel at the market is not pricing anything in….LOL OK

Edited June 16, 2022 by Gregmal

[Viking]

I do think the inflation will come down. And it will be a recession that does the trick (just like past inflations).

 

What will cause the recession? Not sure. Perhaps the bond market continues to push rates higher until something breaks (a credit event). Who in their right mind wants to own a bond today with inflation running 8.6%? Apparently no one… given the relentless spike in bond yields over the past 6 months.
 

When? Not sure. But probably in the next 6-12 months.

 

[thowed]

7 hours ago, Gregmal said:

I thought the market was pricey pre COVID.

Thank you.  I feel like this was an uncontroversial opinion at the time, but it feels like it's been completely forgotten in terms of extrapolating valuation. 

 

When I'm looking at certain stuff, I'm trying to almost ignore the past 2 years, as it feels much more 'different' - I feel like the longer-term patterns up to March 2020 give a better sense for considering the future.

[crs223]

13 hours ago, Gregmal said:

Plus, it seems energy, not rates is really the remedy.

that is a great point.  The “economy” is begging for more workers and/or reduced demand.  If the Fed’s not going to do it… energy will.

 

hold my beer!

 

 

Edited June 16, 2022 by crs223

[Spekulatius]

The Fed has no way increase energy supply. How would they do that? The Fed can reduce demand via putting the breaks on the economy and thats why they are raising interest rates.

 

Even if the US would be able to increase crude supply by 10%, it would be 1% of total crude supply in the world, not enough to make a difference.

 

It seems that all our economies run too hot and the supply of goods isn’t keeping up. And it’s not just energy either, semis, cars , ag goods, housing, you name it. So now we are reducing demand with a mild recession most likely.

[crs223]

There is too much money chasing too few goods.  This imbalance can be resolved by reducing money or adding goods.

 

The energy industry is stepping up to the plate.  Not by adding goods (you're right they can't) -- but by sucking up money -- something perhaps the Fed should be doing.

 

[mcliu]

Energy prices underlie everything. With the current unrealistic ESG policies, it'll be hard to get supply growth in energy. I think it'll be difficult to reduce inflation unless you have a drastic decline in demand.

[Kupotea]

The problem is that the FED has become a politicized entity. It doesn't matter that inflation is primarily supply driven and that it will likely work itself out within the next 1-2 years because US midterms are in Nov. They need to be seen as being tough on inflation today because high CPI prints aren't going to let up between now and then. There will eventually be a turn when it becomes apparent the FED needs to back pedal but in my opinion that's several months from now. In the meantime, you're going to get a lot of the sky is falling and multiple compression. Agree with Viking that you want to have cash to deploy when the opportunities start to get really juicy.

[tede02]

Wow, big move down on yields today. Lots of discussion about bond market pricing in slowing growth. I'm also curious what long rates are going to do as the Fed starts shrinking the balance sheet. Will it have any impact? I don't have a strong view but I've increasingly found the bond market as fascinating as the equity market. 

[tede02]

The one year US Treasury popped 40 bps this morning. Very close to 4%. Amazing considering it was 0.07% only 12 months ago. 

[Libs]

3 hours ago, tede02 said:

The one year US Treasury popped 40 bps this morning. Very close to 4%. Amazing considering it was 0.07% only 12 months ago. 

 

I had just noticed that and was going to post. It's a huge move.

 

I remember illustrating the impact low interest rates had on stocks (pumping them up) by telling people, "Now imagine if you could get 5% sticking your money in the bank, like in the old days. Wouldn't some people - wouldn't YOU - move out of stocks and take that 5%?"

 

While it's true you can't get 5% in the bank, you can get 3% on something as short as a 3- month treasury. No bueno for stocks.

[Gregmal]

Same as before. Probably 3-4% on 10 year as a longer term stable place. Short term? Who knows? It’s just a matter of the pace of data and the degree to which folks buy into the drama. We re at a place where some claim anything good is bad. So if we wanna run a mock just cuz jobs are strong and shit like that? Anything can happen. Holidays should be interesting. I expect record demand for labor, good wages for workers, and a glut of cheap product related shit.
 

None of this is problematic, but if folks wanna take a run at 6% 10 years…have at it. Don’t think Fed gets above low 4s before data becomes undeniable. You even have Ackman giving 3 handles a yea out. If we settles at 3/4/5…life goes on. I remember getting 5% on my savings account in the 90s. Tech and real estate bubbles and all…imagine that?

[Spekulatius]

38 minutes ago, Gregmal said:

Same as before. Probably 3-4% on 10 year as a longer term stable place. Short term? Who knows? It’s just a matter of the pace of data and the degree to which folks buy into the drama. We re at a place where some claim anything good is bad. So if we wanna run a mock just cuz jobs are strong and shit like that? Anything can happen. Holidays should be interesting. I expect record demand for labor, good wages for workers, and a glut of cheap product related shit.
 

None of this is problematic, but if folks wanna take a run at 6% 10 years…have at it. Don’t think Fed gets above low 4s before data becomes undeniable. You even have Ackman giving 3 handles a yea out. If we settles at 3/4/5…life goes on. I remember getting 5% on my savings account in the 90s. Tech and real estate bubbles and all…imagine that?

You could get ~5% on MM accounts too in 2006, and ~6% in 2000.

[CorpRaider]

If we get to a 7%+ nominal on Treasury zeros, I'ma be posting very infrequently.

Edited September 14, 2022 by CorpRaider

[scorpioncapital]

16 hours ago, Spekulatius said:

You could get ~5% on MM accounts too in 2006, and ~6% in 2000.

 

How did stocks do when MM was 5-6%? I truly hate to say it but I've seen stocks burst bubbles at high rates, low rates and I've seen stocks do well at high rates and low rates, just not outliers like 10%+..

[Spekulatius]

14 minutes ago, scorpioncapital said:

 

How did stocks do when MM was 5-6%? I truly hate to say it but I've seen stocks burst bubbles at high rates, low rates and I've seen stocks do well at high rates and low rates, just not outliers like 10%+..

Well, we know the answer - the economy tanked in 2001 and 2008 and the the stock market went down with it. I would say so that in both cases, the interest rates weren't the root cause of the decline as they were lowed when the economy was weakening.

 

On the Zack's podcast, one economist stated that interest rates <5% have never really caused a recession by itself, which I found interesting.

[tede02]

All-right guys, 10-year has broken well through 4%. Man, it is going to be interesting to see where things go in the next few months. The inflation numbers in the UK are crazy. US economy remains resilient. Fed will keep hiking short rates. Will balance sheet reduction result on long rates moving up? Or will foreign investors start dumping money into long treasurys? I don't know but what a year it has been. 

 

10 year is presently at highest yield since 2008. 

 

 

Edited October 19, 2022 by tede02

[TwoCitiesCapital]

3 hours ago, tede02 said:

All-right guys, 10-year has broken well through 4%. Man, it is going to be interesting to see where things go in the next few months. The inflation numbers in the UK are crazy. US economy remains resilient. Fed will keep hiking short rates. Will balance sheet reduction result on long rates moving up? Or will foreign investors start dumping money into long treasurys? I don't know but what a year it has been. 

 

10 year is presently at highest yield since 2008. 

 

 

 

1) Highest yield since 2008 after

2) Two quarters of negative GDP prints in the books and a neutral to negative Q3 expected

3) Falling home prices

4) Many traditional economic staples like Target, Walmart, FedEx, etc all have already been disappointing on earnings with more likely to come

5) USD soaring to 20 year highs

 

The only shoe that hasn't dropped yet is unemployment...which is a lagging indicator.

 

We're closer to the end of the rate cycle than many want to believe I think. Instead of a pivot, we may get a pause. But I don't think the Fed can do too many more hikes at 0.75%...stuff is already breaking like EM budgets and the UK pension system and people are already talking about how illiquid US treasuries are becoming without the additional pain being inflicted. 

[ERICOPOLY]

On 6/15/2022 at 10:50 PM, Viking said:

CPI is just a math equation. Help me understand what component will be coming down any time soon? Shelter? Energy? Food? Or are you thinking along the lines of something like  ‘immaculate conception’? That will bring it down?

 

Shelter is an interesting one because there is an undersupply of it and higher interest rates add to the cost of new units.  That should necessitate higher rents.

[Viking]

7 hours ago, tede02 said:

All-right guys, 10-year has broken well through 4%. Man, it is going to be interesting to see where things go in the next few months. The inflation numbers in the UK are crazy. US economy remains resilient. Fed will keep hiking short rates. Will balance sheet reduction result on long rates moving up? Or will foreign investors start dumping money into long treasurys? I don't know but what a year it has been. 

 

10 year is presently at highest yield since 2008. 

Rising interest rates are doing what they are supposed to do - slow economic activity. Market interest rates increased before the Fed actually started raising the Fed funds rate earlier thiscyear (the jawboning part of Fed policy). The interest sensitive part of the economy got hit first… and no surprise, 8 months later, housing has turned aggressively down. We are just starting to see corporate profits slowing and this should pick up steam in the coming 4-6 months. And the labour market should turn as companies are forced to retrench. The interesting dynamic this time (versus 2008 and 2020) is inflation. How fast does it come down? Inflation prints will likely inform what the Fed does. And what the Fed does will determine if we get a mild, medium or severe recession in 2023.