July 9, 2021

What US Treasuries are telling us!

What US Treasuries are telling us!

Recent (loose) talk by the Federal Reserve’s Open Market Committee (which, at least in its own ‘mind’ dictates American monetary policy, such as setting notional short term interest rates) about tapering the amount of assets that it buys every month or other forms of monetary tightening (basically making borrowing more expensive and/or less available) saw short term interest rates move higher while at the same time longer term treasury bond interest rates (20 years or more) have fallen sharply – in other words, the extreme ends of the treasury curve, short term and long term, have moved in different directions which is significant in that it typically indicates the future outlook for economic conditions such as growth and inflation.

What changed last month was that short term rates, which had fallen since late January, began moving higher, whereas long term rates, which had been rising started falling (we’ve also seen a comparable effect in commodity markets with oil for immediate delivery generally increasing in price, but oil for future delivery not keeping pace).

All of this is telling us that not only is the recent supply shock (akin to a speed skid mark in the post-Covid opening) every bit as transitory as policymakers such as the Fed continue to insist, but it also implies, especially in the case of treasuries, that policymakers might make the future situation even worse than it would otherwise have been.

If short term policy rates rise (because the Fed Open Market Committee [or “FOMC”] is worried about inflation), that can dissipate short term inflation worries but it will also put a brake on longer term economic growth.

In other words, increasing short term rates right now leads to lower long -term rates because of the perceived feedback loop in the future from higher interest rates today acting as a drag on future growth, especially if it reaches the stage that long term rates fall below short-term ones (an inverted yield curve, which typically indicates a coming recession), although we’re not at that stage yet.


Morton’s Fork’ implies that opposite actions might result in the same outcome



How should you position your portfolio in the view of MBMG IA experts?


MBMG Investment Advisory is licensed by the Securities and Exchange Commission of Thailand as an Investment Advisor under licence number Dor 06-0055-21.

For more information and to speak with our advisor, please contact us at info@mbmg-investment.com or call on +66 2 665 2534.

About the Author:

Paul Gambles is licensed by the SEC as both a Securities Fundamental Investment Analyst and an Investment Planner.

Disclaimers:

1. While every effort has been made to ensure that the information contained herein is correct, MBMG Investment Advisory cannot be held responsible for any errors that may occur. The views of the contributors may not necessarily reflect the house view of MBMG Investment Advisory. Views and opinions expressed herein may change with market conditions and should not be used in isolation.

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