December 6, 2018
BETTING AGAINST DONALD:
Explainer: What is an inverted yield curve? (Reuters, 12/06/18)
Shorter-dated securities are highly sensitive to interest rate policy set by a central bank such as the U.S. Federal Reserve.Longer-dated securities are more influenced by investors' expectations for future inflation because inflation is anathema to bond holders.So, when the Fed is raising rates, as it has been for three years now, that pushes up yields on shorter-dated bonds at the front of the curve. And when future inflation is seen as contained, as it is now because higher borrowing costs are expected to become a drag on the economy, investors are willing to accept relatively modest yields on long-dated bonds at the back end of the curve.
The deflationary epoch is driven by the free movement of goods and people (and the decline in labor costs as a function of off-shoring, integration and technology).
Donald and his war on trade and immigration represent a temporary inflationary aberration. The Fed is fighting him prophylactically with rate hikes and the market is responding logically in pricing securities.
Donald can either abandon his Nationalist policies and get credit for extending the Bush/Obama recovery or he can set up his successor for an easy first term.
Posted by Orrin Judd at December 6, 2018 4:11 AM