Too good… “The learned behaviour for equity markets is to get upset if real yields rise was learned over this period and ended up raising a petulant child.” 😂
Peter, thanks for the post but isn't there a tension in saying that both 1) debt-financed growth creates a larger need for rising real yields, and 2) whether or not growth comes from debt “doesn’t really matter”? Debt-financed growth can put near-term pressure on demand and therefore require tighter financial conditions, but that is not the same as saying that it justifies permanently higher equilibrium real yields, is it?
Okay, but even if Treasury could borrow indefinitely at any level of nominal yields (of which I am not convinced, but let’s assume it true), shouldn’t that eventually result in a much higher level of long-term inflation expectations, i.e. in lower long-term real yields?
I think you would likely see both expand because in your more extreme example (indefinitely) there would be premium in real yields for the lenders.
My example isn't as extreme. Treasury could easily go from 6% deficit ro 12% (like during the pandemic) if it needed to. This would subsidise an incredible amount of private sector contraction
And indeed the whole real yield curve went negative, in the aftermath of the pandemic. Different monetary policy settings, sure, and primarily driven by nominals rather than breakevens, but in that "real-life" stress scenario the equilibrium real yield priced in was very different from today's.
Such a Great post - what do you need to see to move neutral rates? 2% real rates feels like no man’s land. Also don’t disagree on world ending with elevated 30year but is it not pre curser to a downturn in economic growth via housing and investment as well as wealth effect from equities.
You can only know neutral if there was a level the govt would bring down spending. If the private sector slowed on higher rates, spending might actually increase in which case neutral would keep moving higher
The traditional transmission was as you mentioned about housing and investment, and they would slow. If govt didn't increase spending then there would be a case to buy bonds and ride the cycle.
another banger per usual - appreciate you
Too good… “The learned behaviour for equity markets is to get upset if real yields rise was learned over this period and ended up raising a petulant child.” 😂
😂
Peter, thanks for the post but isn't there a tension in saying that both 1) debt-financed growth creates a larger need for rising real yields, and 2) whether or not growth comes from debt “doesn’t really matter”? Debt-financed growth can put near-term pressure on demand and therefore require tighter financial conditions, but that is not the same as saying that it justifies permanently higher equilibrium real yields, is it?
Only when the borrower is not sensitive to the level of rates i.e. Treasury
This is what makes the tension. Normally private sector would be sensitive and slow borrowing. Govt will probably do the opposite in slowing demand
Okay, but even if Treasury could borrow indefinitely at any level of nominal yields (of which I am not convinced, but let’s assume it true), shouldn’t that eventually result in a much higher level of long-term inflation expectations, i.e. in lower long-term real yields?
I think you would likely see both expand because in your more extreme example (indefinitely) there would be premium in real yields for the lenders.
My example isn't as extreme. Treasury could easily go from 6% deficit ro 12% (like during the pandemic) if it needed to. This would subsidise an incredible amount of private sector contraction
And indeed the whole real yield curve went negative, in the aftermath of the pandemic. Different monetary policy settings, sure, and primarily driven by nominals rather than breakevens, but in that "real-life" stress scenario the equilibrium real yield priced in was very different from today's.
And also very temporary. High reals was the pandemic trade rather than low. Low reals was the pre stimulus recessionary trade
Such a Great post - what do you need to see to move neutral rates? 2% real rates feels like no man’s land. Also don’t disagree on world ending with elevated 30year but is it not pre curser to a downturn in economic growth via housing and investment as well as wealth effect from equities.
Thanks!
You can only know neutral if there was a level the govt would bring down spending. If the private sector slowed on higher rates, spending might actually increase in which case neutral would keep moving higher
The traditional transmission was as you mentioned about housing and investment, and they would slow. If govt didn't increase spending then there would be a case to buy bonds and ride the cycle.