Post #1601

🇺🇸On US Rates Term Premium As promised in the mkt update post here, here is another good reason for the increased volatility of the US yield curve ======================== ∘ US treasury yields are rising on several reasons: 1) the US economy is much stronger than expected ➜ employment numbers strong + economic output consistent ➜ mkt revise down the number and speed of Fed rate cuts 2) inflation, particularly structural long-term inflation, fears remain high ➜ inflation prints remain hot ➜ Trump, if elected, expected to fan inflation. Trump is for tariffs, against immigration and amendable to big tax cuts: all inflationary longer term 3) the enormous fiscal deficit of the US govt ➜ US debt spiralling out of control with no solution in sight 4) yields term premium is increasing 🔥 (this is the subject of the post) ➜ "term premium" refers to extra return Treasuries investors require to bear the risk that rates may change over the life of the bond. It does not include the short-term expectations of the Fed's policy setting ➜ the term premium is historically positive but turned negative since 2018 as a result of ZIRP 🔥 Now this term premium is turning positive again (see attached) and drawing more attention from monetary policy makers. Fed do not need to cut in Nov and Dec @joe_lavorgna shows in his chart (see attached) that the 10Y Treasury yield is rising in tandem with the ACM term premium over the past month ∘ this suggests that the rise is largely driven by the term premium ∘ instead of expectations of higher future short-term rates ∘ this then reduces the need of the Fed to cut further in Nov and beyond as a response to mkt's expectations of her policy intentions ∘ this can cause a reflexive upswing in long rates when policy rate hesistancy can result in a reprice of the yield curve front end which pressurizes the long end which further drives up the term premium The Term Premium, Rates Volatility, Demand/Supply and Inflation @crossborder_capital says the term premium is made up of: ∘ rates volatility ∘ demand/supply dynamic of treasuries ∘ inflation expectations 🤔 and each of these components are in-turn effected by the factors 1) to 3) stated ☝️so the reasons for rising long rates are multi-faceted and interconnected. The potential of a sweep by the Republicans in Congress and the accompany sea-change in monetary and fiscal policies, potential of a upcoming recession in the US etc. are all reasons for a steeper and more volatility yield curve going in 2025 and beyond. The concept of a term premium for the US yield curve will be a useful tool to complement our consideration of US interest rates. Hope its useful. Have a good weekend. #rates#macro#views