Out of the Box: Shakespeare on Bonds
“I can get no remedy against this consumption of the purse: borrowing only lingers and lingers it out, but the disease is incurable.”
-Shakespeare, Henry IV, Part 2
In October, November and December the Fed was the villain, especially in December. Jerome Powell spoke, and the markets got hammered by his words. By the time January arrived the Fed had morphed into a very different creature. They had changed spots and were the heroes of the markets. It is amazing, in life, how these things happen. One moment a central bank is a hyena and the next moment it is a frolicking zebra. There is great magic now upon the land.
The ten year Treasury is now around a 2.15% yield and this is the time, in my humble opinion, to take a hard look at your bond portfolios to see if there are not only some credits that need pruning but if you can take a profit, go into a higher yielding bond, or a better credit, and take advantage of the Fed’s gift. The Genie has come out of the bottle and it is time to utilize the present that the Fed has given us.
Hark, the Herald Angels Sing!
“Put money in thy purse.”
What also strikes me now is that the six-month Treasury Bill has a yield of 2.20% and that you don’t see any yield like that again, on the Yield Curve, until you reach the 30-year bond which now yields 2.62%. You can say a recession is near, but I doubt it. You can say that the markets are way ahead of the Fed, and expecting rate cuts ahead, which may be true. However, in terms of the Inversion, I think it is merely that the Fed, to date, has not bought Treasury Bills and so the 800-pound Gorilla has not yet entered that room. I expect them in shortly, however.
We have never had the central banks controlling the markets in the way they are now. Consequently, old assumptions must give way to new understandings. The playing field of the Great Game has been radically altered. The central banks of the world, I point out, regardless of the “Independence” motifs, are all central banks of a nation, or a union of nations, and so, especially in Europe and Japan, “Negative Yields,” and the like, are controlled by the nations that need them as they cannot afford their social programs otherwise. Please read that again, “They cannot afford them otherwise.” Get this concept also firmly entrenched in your head. We are not heading to higher yields any year soon, maybe any decade soon.
The correlation here is also apparent in the credit markets. Bloomberg’s U.S. Treasury Index is up 3.75% since the beginning of the year, Bloomberg’s Corporate Index is up 7.61%, for the same time period, while their High Yield Index is up 8.78%, since the year started. These are not insignificant moves, and they also tally over to new deal pricing, ETF’s and Closed-End Funds that are attached to the credit markets.
“If money go before, all ways do lie open.”
-Shakespeare, The Merry Wives of Windsor
The problem, of course, is that money management requires an immense amount of thinking and a strategy. However, events and circumstances can alter expectations, and so your strategy has to now be altered to fit the new circumstances. Some people, clearly, are better thinkers than others. “Re-invention is one of the keys to success on Wall Street.”
Then there is the “Underlying Assumption” issue. So very hard to get away from what you have been taught, and what has worked, in the past. The center of the issue today is that we have never before had the central banks controlling the markets in the manner which they are now. When the German 10 year is yielding -0.234%, and the Swiss 10 year is -0.510%, nothing is impossible, in our new environment. In fact, there are now $10.7 trillion in negatively yielding bonds out there which is a 60% increase since September.
The central banks have always been part of the show. I said some months back that the central banks were driving the show. I have now reached a new conclusion. The central banks ARE the show, and there is no person, or financial institution, that can stand in their path. When you can make the money, then you make all of the rules.
In the days before the 2008/2009 Recession, most money managers thought that the short-term side of the yield curve was mainly driven by Federal Reserve policy while the long-term end of the yield curve, 5-year Treasuries and further out, was thought to indicate bond investors’ long-term views of the economy and of the markets. This concept is now outdated and a fantasy of history. The makers of money, a very small group of people, have now re-written the play book.
What comes to mind now is should the central banks have this kind of power? The nations of the world have ceded their democratic authority to these people, in all but the most dire of circumstances, where Congress or the European Union could, theoretically, terminate their charters.
The notion of “Independence” is one thing but the notion of giving a handful of people total control over the monetary system of the world, and the equity and debt markets of the world, is a troubling concept, when all is said and done, and I honestly wonder if it is in the best interests of Democratic nations to have done this. Time and tide will eventually provide the answer.
“Nothing comes amiss, so money comes withal.”
-Shakespeare, The Taming of the Shrew
Mark J. Grant
Chief Global Strategist, Fixed Income
B. Riley FBR Inc.
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