william the wie
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- Nov 18, 2009
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The declared Fed goal is normalization. The long run normal 10 year treasury yield is equal to the rate of GDP growth currently 3-5% in the guesstimation of various members of the Fed and there are at least three breaking points:
Based on the treasury's guess 2.6% is the breakeven national debt point. Even a 0.01% debt reducing surplus will compound. That will cause a drop in the supply of T bills and other forms of national debt. That in turn will cause a bidding up of prices and lower yields. However small that reduction is that will make big news. Raising rates to create a curb on wage push inflation will be difficult.
Three stumbles and a fall is how most short lived downturns in the stock market happen. We are only two or three more rate hikes away from such a bear Market. That kind of shift in the yield curve also shifts the market from growth to dividend stocks. The FANG stocks will lose literal trillions in market cap when that happens.
Then there are the unfunded mostly blue state liabilities that are predicated on much higher returns. Such Munis are already paying higher and tax exempt yields than treasuries of comparable maturity. As the yield curve is driven down defaults will happen and taxes will go way up in such jurisdictions.
How will these breakpoints interact?
Based on the treasury's guess 2.6% is the breakeven national debt point. Even a 0.01% debt reducing surplus will compound. That will cause a drop in the supply of T bills and other forms of national debt. That in turn will cause a bidding up of prices and lower yields. However small that reduction is that will make big news. Raising rates to create a curb on wage push inflation will be difficult.
Three stumbles and a fall is how most short lived downturns in the stock market happen. We are only two or three more rate hikes away from such a bear Market. That kind of shift in the yield curve also shifts the market from growth to dividend stocks. The FANG stocks will lose literal trillions in market cap when that happens.
Then there are the unfunded mostly blue state liabilities that are predicated on much higher returns. Such Munis are already paying higher and tax exempt yields than treasuries of comparable maturity. As the yield curve is driven down defaults will happen and taxes will go way up in such jurisdictions.
How will these breakpoints interact?
