What the bond market is telling us about the Biden economy

    Business Inquiry

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    Credit …Carlos Baria / Reuters

    While Washington debates the size of a new economic rescue plan, the bond market is sending a message: a meaningful uptick in both growth and inflation in the years ahead seems more likely than just a few weeks ago.

    This would be mostly good news, suggesting an economy recovering from the epidemic. Interest rates are very low by historical standards, even for the longest-term securities. Bond prices mean the consumer will be in line with the Federal Reserve’s 2 percent annual increase in price, not a more worrying spiral.

    But the rate hike has ended for a period of several months when lending was essentially free, seemingly distant in the future. For the Biden administration and the Federal Reserve, this implies that the crisis-free lunch phase is ending, and there may be tough questions ahead.

    In particular, this means that the downside of poor policy – federal spending that does not generate much economic activity, for example – is higher than in recent December.

    PGIM Fixed Income Chief Economist Nathan Sheets said, “We are in a place where markets are beginning to grapple with whether today there are trade offs between higher incentives and potentially higher rates and higher street inflation.” . And a former officer in the Treasury and the Fed.

    The yield on 10-year Treasury bonds – the United States government would have to pay to borrow money for a decade – was 1.37 percent on Monday, lower than historical standards but lower than its recent 0.51 percent in August and finally 0.92 Above the percentage. Of December. Those high treasury rates typically translate into higher mortgage rates and corporate borrowing costs, so the boom could wind up some of the fickle housing and financial markets.

    The inflation-adjusted interest rate the United States Treasury must pay to borrow money for 30 years was negative for most of the previous year, meaning that the government would invest investors in inflation-adjusted terms compared to borrowing Will pay less Last week, the rate rose to positive territory for the first time since June and closed at 0.06 percent on Monday. (For shorter time horizons, the “real yield” remains in the negative zone.)

    Especially given that Fed officials have repeatedly stated that they expect short-term interest rate targets to be near zero for a considerable period of time – and bond investors appear to believe them. The yield on the two-year treasury has barely increased over the same period.

    What is happening is known as the “fall in yield curve”, with long-term rates continuing to rise as short-term rates. It promotes rapid economic development; This is in contrast to the “yield curve inverse”, which is known as the precursor to recession.

    But the other side of it is that the moment has passed when bond markets were giving a clear signal to the government to do whatever was necessary to boost the economy, essentially ending money at an extraordinarily low price. Were provided at There may be implications as to how the Biden administration adopts the rest of its economic agenda.

    Treasury Secretary Janet Yellen has emphasized that low interest rates, which keep the cost of debt servicing low, are important in her thinking about how much the government can comfortably borrow and spend.

    At the New York Times delbook conference on Monday, Ms. Yellen, noting that the ratio of government debt to the size of the economy is much larger than before the global financial crisis, said: “Look at a different metric, which is more important , Which is the cost of that debt. See for example the interest payments on debt as a share of GDP, “which is below the 2007 level.

    “I think we have more financial space because of the interest rate environment,” Ms. Yellen told Andrew Ross Sorkin of the Times.

    By implication, bond yields rise, and along with inflation expectations, the Biden administration will look to constrain its potential spending. Congress is now working on a $ 1.9 trillion pandemic aid package that Democratic leaders hope to pass in March. They then envision a massive infrastructure plan.

    Federal Reserve Chairman Jerome Powell will ask Congress questions about the central bank’s policies on Tuesday. In other recent demonstrations, he has emphasized the importance of returning the economy to full health above all other targets, and emphasized that inflation is much lower than in the previous decade.

    Katie Nixon, chief investment officer at North Trust Wealth Management, said, “Fed Chair Powell accepts every opportunity to reassure investors that the Fed will consider imminent inflationary pressures.” “The market is taking the Fed into its word that small rates will be anchored to zero for a long time.”

    The difference between regular and inflation-protected bond prices near Friday is that the consumer price index is expected to rise to 2.29 percent per year over the next five years and 1.99 percent per year for the following five years. The Fed’s target is 2 percent annual inflation, measured by a separate index, which reduces somewhat, meaning that these so-called “inflation breakdowns” are consistent with central bank goals.

    Put it all together, and the rate hikes so far are basically an optimistic sign that the post-pandemic economy will mark the end of a long period of sluggish growth. But the pace of adjustment is a reminder that the line between too hot and perfect is a narrow one.

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