Despite Rising Bond Yields the Yield Curve is Still Flattening




Economists like to watch the 2-10 spread because that is one of the most reliable recession indicators.

Seemingly, inversions are far away, but that is mostly an illusion.

The 2-10 spread has been sinking like a rock. That spread was 1.58 percentage points on March 19, 2021 as shown in the lead chart. It’s now down to 0.61 percentage points.

If the Fed gets in as little as two hikes, the 2-10 spread will invert as it typically does before a recession. 

Of course, the 10-year yields may keep rising, but the problem is 2-year yields have risen faster. 

Author(s): Mike Shedlock

Publication Date: 8 Feb 2022

Publication Site: Mish Talk

Life and Annuity Issuers Watch for Interest Rate Hike Sunshine



Executives are hoping that Fed interest rate increases could increase the yields on insurers’ huge investment portfolios.

Higher rates could be a good thing for Prudential, the company’s vice chairman told analysts.

MetLife’s CEO said higher short-term rates could mean a flatter yield curve that would be less favorable to life insurers.

Author(s): Allison Bell

Publication Date: 4 Feb 2022

Publication Site: Think Advisor

Opinion: The ‘interest rate comet’ is about to slam into the U.S. economy



According to the U.S. Treasury, in fiscal 2021, the amount of interest paid on the national debt was $562 billion including government transfers. The amount actually paid out to holders of U.S. securities was $413 billion.

That figure alone, which is over 20% of what we paid in income taxes in FY 2021, should be alarming when compared to other government expenditures.

Compare the $413 billion we pay in interest to holders of these securities to the annual budgets of other parts of the government. The State Department annual budget is “only” $35 billion and the Justice Department $39 billion.


Interest rates are still near an all-time low. According to the Monthly Treasury Statement, in 2001, interest paid on the national debt was an average of 5.4%, about 3½ times what it is now.

If we get back to that rate, which is far from inconceivable, interest on the debt would cost American taxpayers $1.4 trillion, based on our present level of national debt. That is twice the budget of the Defense Department.

Author(s): Peter Tanous

Publication Date: 27 Jan 2022

Publication Site: CNBC

What does risk really mean?



In Bloomberg last week, I argued that the price of safety is mis-priced. Real yields have been negative for the better part of the last 10 years, and have been very negative since the pandemic. And the Fed has no plans to bring it above zero. I can understand a market negative real yield from time to time for convenience reasons. But all of the time? For decades? How can you explain that? Well, I blame the Fed and regulatory policy, as well as other countries buying lots of safe assets to manage their currencies. Lately, it’s been a lot of the Fed.

The risk-free rate is always being tinkered with by policymakers. Maybe it never actually equals the market price, but sometimes it’s more distorted than others, and it seems like it’s really off right now. And if that’s true, what does that say about the price of any risky asset? Perhaps that explains why crypto currencies are worth so much despite not offering much inherent value and having such a high Beta. When celebrities are hawking an esoteric risky asset, you know something is wrong.

Risk-free assets are the most systematically important asset in markets. They touch absolutely everything. And when it goes wrong, things get real. When market prices are not market prices for years at a time, risk gets distorted, and people subsequently take on more risk than they realize. I’m not predicting a financial crisis, but I do reckon that this could be why markets are just so weird right now.

Author(s): Allison Schrager

Publication Date: 24 Jan 2022

Publication Site: Known Unknowns

How High Are Federal Interest Payments?




Even with exceptionally low interest rates, the federal government is projected to spend just over $300 billion on net interest payments in fiscal year 2021. This amount is more than it will spend on food stamps and Social Security Disability Insurance combined. It is nearly twice what the federal government will spend on transportation infrastructure, over four times as much as it will spend on K-12 education, almost four times what it will spend on housing, and over eight times what it will spend on science, space, and technology. 

Publication Date: 10 Mar 2021

Publication Site: Committee for a Responsible Federal Budget

Something Is Awry in the Treasury Market This Summer



The core of the problem is that as inflation soared, bond yields fell, creating an instant contradiction: Inflation is poison to bond investors, so they would normally be expected to sell. I have an explanation, but it isn’t perfect.

My take: Investors came to the realization that the huge post-pandemic debt burden will keep rates lower than in the past, while they kept faith that inflation will be manageable. There is little to indicate investors fear a recession-inducing mistake by the Federal Reserve, and they aren’t expecting runaway inflation either.

The market response from March to the start of this month can be thought of as pricing in a repeat of the secular stagnation brought on by the 2008 financial crisis, with the twist of slightly higher inflation than in the past decade.


And there is one more oddity that is far harder to understand: By Aug. 3, yields on 10-year Treasury inflation-protected securities, or TIPS, reached minus 1.2%, the lowest point for inflation-adjusted yields in history.

It could only make sense if investors were expecting stagflation, or weak economic growth combined with higher inflation. But if the risk of stagflation were rising, investors should be buying gold — which usually rises when TIPS yields fall — and dumping the junkiest corporate bonds, as defaults would be sure to rise. Instead, the relationship between gold and TIPS broke down, while junk bond yields rose only a little from what had been close to record low spreads over Treasurys.

Author(s): James Mackintosh

Publication Date: 15 August 2021

Publication Site: Wall Street Journal

Why Investors Can’t Quit U.S. Debt




Second, there is another $12 trillion in dollar-denominated assets issued by entities outside the United States, according to the Bank for International Settlements. Combine this with the dollar assets exported from the United States, and there exists roughly $32 trillion in relatively liquid and safe dollar assets abroad, as seen in the figure below.

There is no other currency system that comes close to providing so many safe and liquid assets to the world. On one hand, this outcome is not surprising, given the dollar’s dominant role in the global economy. On the other hand, the implication of this fact is astonishing: There is no alternative source of safe and liquid assets available on such a large scale. This means that if investors wanted to break up with the global dollar system, there would be nowhere else to go to meet all their relationship needs.

Author(s): David Beckworth

Publication Date: 31 March 2021

Publication Site: National Review

More Rate Scares Ahead for Stocks



Expectations of a stronger economy count as a positive development for companies’ earnings prospects, but they are pushing long-term interest rates higher, with the 10-year Treasury recently yielding 1.41% versus 0.93% at the start of the year. That isn’t unusual, since long-term rates typically go up as the economy’s prospects improve, but then again stocks haven’t tended to be as expensive at the start of recoveries as they are now.

The S&P 500 trades at about 22 times analysts’ expected earnings over the next year, according to FactSet, which is close to its highest forward price-earnings ratio in 20 years. In December 2009, six months after the last recession ended, the S&Ps forward P/E ratio was about 14.

As a result, even relatively modest moves upward in Treasury yields, and therefore the relative attractiveness of bonds to stocks, can cause market spasms. This is particularly true of the richly valued technology shares that have been among the biggest market winners since last spring.

Author(s): Justin Lahart

Publication Date: 3 March 2021

Publication Site: Wall Street Journal

Most U.S. Treasury Yields Close Lower



Yields on most U.S. government bonds fell Monday, showing further signs of stabilizing after soaring to multi-month highs last week.

The yield on the benchmark 10-year Treasury note settled at 1.444%, according to Tradeweb, down from 1.459% Friday.

Shorter-dated yields also headed lower, in a reversal from last week when investors bet that the Federal Reserve will start raising interest rates earlier than previously anticipated in response to an expected burst of economic growth and inflation.

The five-year yield settled at 0.708%, from 0.775% Friday. Yields fall when bond prices rise.

Author(s): Sebastian Pellejero and Sam Goldfarb

Publication Date: 1 March 2021

Publication Site: Wall Street Journal

Bond-Market Tumult Puts ‘Lower for Longer’ in the Crosshairs



A wave of selling during the past two weeks drove the yield on the benchmark 10-year Treasury note, which helps set borrowing costs on everything from corporate debt to mortgages, to above 1.5%, its highest level since the pandemic began and up from 0.7% in October.


Traders said concerning dynamics were evident in a Treasury auction late last week. Demand for five- and seven-year Treasurys was weak Thursday heading into a $62 billion auction of seven-year notes and nearly evaporated in the minutes following the auction, which was one of the most poorly received that analysts could remember.

The seven-year note was sold at a 1.195% yield, or 0.043 percentage point higher than traders had expected — a record gap for a seven-year note auction, according to Jefferies LLC analysts. Primary dealers, large financial firms that can trade directly with the Fed and are required to bid at auctions, were left with about 40% of the new notes, about twice the recent average.

Author(s): Julia-Ambra Verlaine, Sam Goldfarb

Publication Date: 28 February 2021

Publication Site: Wall Street Journal

Bond Selloff Prompts Stock Investors to Confront Rising Rates



The sharp increase this month in U.S. government-bond yields is pressuring the stock market and forcing investors to more seriously confront the implications of rising interest rates.

The lift in yields largely reflects investor expectations of a strong economic recovery. However, the collateral damage could include higher borrowing costs for businesses, more options for investors who had seen few alternatives to stocks and less favorable valuation models for some hot technology shares, investors and analysts said.

As of Friday [Feb 19], the yield on the benchmark 10-year U.S. Treasury note stood at 1.344%, up from 1.157% just five trading sessions earlier and roughly 0.9% at the start of the year.

Author(s): Sam Goldfarb

Publication Date: 21 February 2021

Publication Site: Wall Street Journal

Municipal bond yields rise, swept up in Treasuries surge



Earlier this year, the $3.9 trillion market where states, cities, schools and other issuers sell debt had been resisting a steep sell off in Treasuries that lifted yields, putting the historically close correlation between the two markets out of whack.

Now, munis are catching up, with the 10-year yield on Municipal Market Data’s (MMD) benchmark triple-A scale, which started 2021 at 0.720%, climbing 45 basis points since Feb. 12. It closed up 5 basis points at 1.14% on Thursday.

The iShares National Municipal Bond exchange-traded fund (ETF) fell on Thursday to its lowest level since November at 115.14. The largest muni ETF, which reached an 11-month high of 117.95 on Feb. 11, was last down 0.43% at 115.30.

Author(s): Karen Pierog

Publication Date: 25 February 2021

Publication Site: Reuters