10 year bond yields are a strong barometer of where interest rates are going because like the Baby Bears porridge it’s just about right to tell what is going on in the crazy world of central bank fixed interest rates.
At the short end of the curve, there are often no interest rates and they can go negative. Negative interest rates are basically a function of hot money needing to park their cash safely in assets that won’t go bust, ever. Imagine you’re an Arab or Chinese prince-ling with a billion or two, going from one big deal to another. You don’t want to put the money in the bank, naked and uninsured, or perhaps regulated by awkward know your customer questions, you’ll pay to have it safe for a while. This is the land of financial fear and fear pays a premium for safety and that price is negative interest rates.
Out at the long end of bonds all values are about interest yield and because to put your money in that 30 year buried trunk with little hope of your capital back on expiry in your lifetime, you want a fatter yield than at the short end, so the interest rates are higher. Even so the central banks have sucked that stuff up too so the rates are down to 3%. However that’s not zero and still nearly a 1% higher than a ten year bond and a full 2.7% higher than a bond expiring in a year.
This is what makes up the so called bond curve, it’s the different payouts on different term bonds.
Its all screwed up if you look at historical curves but then that’s to be expected because this isn’t a free market, it’s the moonscape of QE, the landscape of the nationalization of capital. But lets forget the nationalization bit, at least for now, because something is changing in the dynamic.
Bond yields have been falling in a consistent straight line for a long time now. Short term interest rates have gone from something to nothing, to negative. 10 year rates have followed hitting rock bottom of nearly nothing in Germany and just above 1.5% notionally in the US. Recall the US owes 18 thousand billion, so getting a loan at 1.5% on the next trillion or two is a pretty amazing feat, considering doomsters have predicted a lenders strike and default.
However the ever downward trand suddenly reversed a few weeks ago a trend clear in Europe than in the US. From rates of nuppence, zilch and nadda bonds have jumped in a spike that very much looked like the end of a trend.
That spike is just the sort of reversal that the doomsters would suggest was the beginning of the end. Lets get that straight though, they would see it the beginning of the end of everything.
But lets not go build an ark or collect up two of every animal just yet.
Interest rates have to normalize and zero percent isn’t that interest rate.
Lets hope for 3-4%, like the bad old days.
It has to get there from zero and that is going to be a bumpy road.
Right now that rate hike has been halted and lets be clear, the Fed, ECB and BOJ can stop and start this process at will currently.
However its halted and while you might like to watch Apple, the Dow or the dollar Yen, the real number to watch is the US 10 year bond rate.
Right now it is resting, but if the US 10 year went another leg up from 06% to 1.2% things are going to get hairy because unlike Baby Bear’s porridge things are going to start getting too hot for many people’s zero interest rate strategies.