Macro Strategmajor bond markets are now among the most worthless of indicators
Exactly one month ago, when commenting on the Fed’s unlimited QE, we summarized Jerome Powell’s unprecedented nationalization of what was formerly the world’s deepest and most important market as follows: “the Fed’s takeover of bond markets (and soon all capital markets), means that any signaling function fixed income securities have historically conveyed, is now gone, probably for ever.”
Now, with the mandatory cool down period to allow “objective contemplation”, others are starting to admit that this was the right assessment. Here is Bloomberg’s macro commentator Mark Cudmore admitting that “Interest Rates Are Past Their Sell-By Date as Guide.”
His full note is below:
Long considered the purest macro instrument, major bond markets are now among the most worthless of indicators.
Conviction is hard to come by right now. It doesn’t help that our established navigation tools are broken.
Free markets are an endangered species. Extraordinary monetary policy measures are now ordinary and bonds are the most distorted markets as a result.
It used to be that a 10 basis point move in U.S. 10-year yields indicated a major shift in market thinking. Now? Who cares.
The only sure message from DM bond markets is that liquidity is abundant. Even the corollary that money is cheap isn’t always strictly true for everyone, precisely because what interest rate you pay on any loan is now far more dependent on who or what you are, rather than what the base rate is in the market.
The Fed and the ECB both meet this week. Never mind not caring about what the policy rate is, we no longer care about their interest rate guidance. Even the banks’ mutterings on inflation are largely a side-show.
Almost everywhere, benchmark rates are near zero and will be staying that way for some time. And those policy rates are almost irrelevant to the inflation story, which is instead a narrative about when a resurgence in global economic demand will potentially clash with supply-side destruction.
What matters from policy makers are the lending and asset-purchase programs. Even there, the message is seeping through that there are no taboos left. “Moral hazard” is an antiquated concept among the supposed stewards of the financial system. With limits removed, the marginal impact of each new measure is diminishing rapidly.
Will stimulus solve the health crisis? Will financial market manipulation solve the real economic problems on Main Street? Does coronavirus infection provide you with subsequent immunity? When will a vaccine be widely available? Good luck working out the answers to these questions from anything 10-yr government bond yields tell you.
So with what should we replace Treasury yields as the ultimate macro guide? Funny you should ask — I’d really appreciate it if you could let me know the answer when you find out.