“Oh, where were you when we needed you?” your editor wailed at his newspaper this morning.
“Why oh why didn’t you speak up before?” we lamented.
“It’s too late now. You should told everyone about this months ago.”
The reason for our despair this morning?
Page 24 of today’s Australian Financial Review, and the headline “Yields rise ahead of expected glut.”
The article quotes JPMorgan head of fixed income Jeff Herbert-Smith, “Globally, we are seeing bond yields move up and in Australia, the supply pressures are putting weight on the market.”
And this from Scott Haslem, chief economist at UBS, he told the paper, “Australia’s absolute debt metrics at the end [are] still very sound… [but] there will still be a cost, and that is most likely to be reflected in higher bond yields as the market absorbs the radical shift in funding needs.”
The only two words we’re waiting for are “unintended consequences.”
It’s a good job your Money Morning editor warned you as recently as May 14th in our notes titled “No Such Thing as a Good or Manageable or Acceptable Level of Government Debt.”
We wrote:
“Think of it this way, the more debt on issue the less valuable or scarce existing and new issues become. Therefore the price must be lower. And if the price is lower then equally the yield must be higher. Think of it another way, if you already own a large amount of something (debt for instance), then your appetite to buy more is less. So you will pay less for it at a higher yield.”
We also wrote that in the short term, yields could fall as investors quickly fill their boots with the newly issued government, but the demand wouldn’t last. Well, it looks as though the short term is over. Yields are indeed on the rise.
Take a look at this chart…
You can see in just one week, the yield on bonds has already increased. You can’t really tell by this chart, but the yield on the 10-year bond has increased by 16 basis points.
The blue line indicates the bond yield curve from one week ago, and the red line shows the same yield curve a week later.
But of course the mainstream commentators, analysts and economists have all been cheering for increased government debt and increased spending in order to help the economy recover. While they’ve been cheerleading for wasteful spending they’ve either knowingly ignored the impact this will have on interest rates and inflation, or…
Their economics degrees aren’t worth the paper they’re written on.
Not only that, it makes a mockery of the nonsense comments made by the analysts on inflation. Remember the comments they trotted out about inflation being “dead”? Remember the comment from the NABs Alan Oster about inflation “not being important right now.”
Well, if we were gobsmacked by the first story, we were floored by the story immediately below it in today’s AFR, it was headlined “Scenario for bonds linked to inflation.”
Hang on, isn’t inflation supposed to be dead? Seriously…
Jarrod Kerr, interest rate strategist at Commonwealth Bank of Australia was quoted as saying, “There’s not much inflation priced out there and if we do get some sort of a recovery in the next couple of years, then you’d expect with the amount of stimulus out there that there’s a chance of higher inflation down the track.”
We repeat, “Where were you six months ago?”
The gist of the story is that now is the time to look at buying inflation protected bonds rather than standard bonds. It shows you perfectly why you should never listen to the advice given by the economists at the banks and brokerage firms.
One reason is based on them getting everything wrong in recent months. The second reason is they’ve been talking down the prospects of inflation but as soon as their bank starts ramping up the sales guys to flog inflation protected bonds then inflation suddenly becomes an issue.
It’s all about their vested interests.
And what about this comment from Kenneth Crompton, fixed income analyst at Deutsche Bank, “We aren’t expecting the 10-year bond yields to top 10 per cent within the next 12 months, but we do think that the experience of 1994, which shows linkers [inflation protected bonds] don’t sell off as much as nominal bonds.”
That should paint a clear picture for you, that suddenly talk has quickly shifted from “record low interest rates” to mainstream analysts warning that interest rates on the 10-year bond could approach 10%.
What impact is that going to have on the housing market? Put it this way, as the longer dated interest rates increase it will have a flow on effect to near term interest rates.
If businesses or banks want to raise short term capital they will have to pay up with higher yields, otherwise they won’t be able to attract investors from the longer dated bonds that are paying a higher yield.
Banks will have to pay higher interest rates on savings and term deposit accounts. Guess what? That will push up variable interest rates on mortgages too.
Unfortunately that’s another tick in the housing bubble box.
We’ve warned about the folly of allowing the government to buy and borrow now, and pay back later (or never). It just cannot possibly work, as we wrote recently in the government is spending Australia to ruin.
We’ll have more on this theme tomorrow. Including a troubling email from a Money Morning reader that suggested if something is in the “public good” then it shouldn’t matter how much it costs.
Why troubling? The email came from an actuary. That’s the profession that is responsible for setting current cost and revenue levels to plan for future cost and revenue levels.
Perhaps it’s the actuaries who we should be giving the hard time, not just the mainstream economists.
Other Stuff on the Markets
The S&P/ASX200 gained 0.19% yesterday, while overnight the Dow Jones Industrial Average dropped by 52 points. Meanwhile the FTSE100 lost 0.31%.
The price of gold in Australian dollars slid back to trade at $1,212.17 this morning, while in US Dollars it is trading at USD$938.10.
The Aussie dollar continues to strengthen versus the USD, trading this morning at USD$0.7732 and JPY73.50.
Crude oil crept higher overnight, closing at USD$61.52 in New York.
For yesterday’s biggest movers on the market click here…
No major economic news in Australia today. In the US tonight the latest Jobless Claims numbers will be released.
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