How can you tell that nobody of economic influence cares about what former federal reserve chairman Paul Volcker has to say anymore?
Some say by the fact that the 30-year treasury yield is breaking out of a long-term downtrend, previously established under Volcker’s tenure when he beat down inflationary expectations in the U.S. government bond market.
Kit Juckes of the Ecu group points out that the yield on the 30-year treasury bond yield has moved above its 100-month average. This average has been trending down since the mid-1980s so this is quite a moment (as of last night’s close, the yield was 4.84% and the average was 4.71%).
Buttonwood argues that this 30-year break-out could be the result of fact that inflation-fighting, well-established since Volcker, has taken a back seat to stimulating the economy and preventing the financial system from collapsing.
Perhaps, but let’s not forget that even inflation expectations are still low in the market as proven by looking at inflation protected securities vs. plain vanilla ones. (Just to be clear, Buttonwood acknowledged that inflation was currently low right now, so we’re not saying they missed this. We’re just saying that it makes a huge argument against the concept of inflation concerns sending up yields right now.)
We’d actually be happy to seee the 30-year yield keep rising, and anyone who has berated ‘easy money’ should agree.
You can’t be complaining about a market fuelled with cheap money while at the same time crying wolf when treasury yields are rising from historically depressed levels… especially if both current inflation and inflation expectations in the market are pretty low, as they are.
So if the 30-year yield heads back to 6%, on a benign inflation outlook, it would actually be a good thing since it’s just the cost of money moving away from historically depressed levels.
Yet, of course, if the yield spikes due to an explosion of inflation expectations, then that would be an entirely different story. But that’s not the case right now.
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