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'Bonkers' Bond Trading Stems from Uncertainty on Impact of the Fed's Panicky Rate Increases [1]
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Date: 2023-03-27
Sceencapture from www.bloomberg.com,
https://www.bloomberg.com/markets/rates-bonds/government-bonds/us March 25, 2023. Annotations by the author.
I came across an NYT article about interest rate volatility that resonated — I know, I’m weird — the link is open access. Here’s the headline and subhead: “‘Bonkers’ Bond Trading May Be Sending a Grim Signal About the Economy. Wild swings in the Treasury market are unlike anything many investors today had seen. They’re also potentially warning of a recession.”
Since last fall, I’ve been whining that the Fed’s interest rate hikes in 2022 were way too far and too fast. There are three reasons 1.) I think price hikes were associated mostly with the pandemic recovery and little Putin’s big invasion of Ukraine, and, while painful, aren’t a long-term or persistent inflation threat, 2.) inflation has settled down quite well in the second half of 2022, and 3.) I just think the pace and magnitude of the Fed’s rate hikes has been too sudden. We needed a change in interest rate policy, but not an economic “shock.”
Wild swings in interest rates for 1 and 2 year Treasury bonds are NOT normal. The swings are due to vast uncertainty about the economy’s direction. The Fed’s job is price stability with low unemployment — it’s a challenging, but clear mandate. But instead, these massive interest rate swings signal that the Fed is instead stoking uncertainty and volatility, not stability and predictability.
Here’s how the Times article puts it:
The wild trading strikes at the heart of the financial system. U.S. government bonds, called Treasuries, are the bedrock of global markets. A rise or fall in Treasury yields, which move in the opposite direction to their price, can ripple through to everything from mortgages to company borrowing — affecting trillions of dollars’ worth of debt. Usually, yields on these bonds rise and fall in tiny increments measured in hundredths of a percentage point, or “basis points.” But in the past two weeks, the yield on two-year Treasury notes has consistently moved within a range of 0.3 to 0.7 percentage points each day.
Ugh. Please, let’s take a few months’ rest from additional rate changes. We need to give time for the 2022 rate hikes to work through all parts of the economy: small business, consumers, banks. Even our “tech” (surveillance capitalist) overlords need time to adapt. We need time for competition to return to many parts of the market, particularly commercial and residential rental rates! The Fed’s panicky rate increases in 2022 are almost certain to cause more long-term harm than good.
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[1] Url:
https://www.dailykos.com/stories/2023/3/27/2160373/--Bonkers-Bond-Trading-Stems-from-Uncertainty-on-Impact-of-the-Fed-s-Panicky-Rate-Increases
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