Interesting chart, but during previous cycles the Fed was often cutting because the US economy was in a recession (with a flight towards safe assets). For once, this time might be different.
What's actually crazy is Denmark spending > $3bn on F35s from Lockheed Martin when the USA is threatening to invade and annex 🇩🇰's territory.
Trump's blustering may cause European gov'ts to ++ defense spending, but chances are they'll stop buying American and hedge risk by boosting domestic R&D.
The last few posts should be linked. The fact that the current ideological belief system shared by traders globally is baffled by our post WWII success, the occurrence of the GFC, and pandemic policy success illustrates its deep failure. When mkts are shaped by identical fantasies they aren’t wise.
Rate movement may be unprecedented but how many times have we cut rates in a strong economy? Not many. I suspect that is the reason for the divergence.
1) Maybe: central banks are buying gold reserves instead of US treasuries. Also, the share that central banks are holding US denominated foreign exchange reserves fell to 57%; the lowest since ‘94. In the linked article, there’s data that shows a steep increase in the amount of gold that central
2) banks are buying. Regarding the election of Trump, there was a drop in gold prices the week after the election. So, the increase in bond prices may be correlated to a decrease in demand for bonds, as there was a surge of gold buying by central banks.
Most CNBC folks are just giddy over the prospect of the " animal spirits " Trump is releasing forgetting how he spectacularly exploded our debt with reckless tax cuts and botched Covid. I wonder if Kramer and Sarah Eisen are on the Trump payroll. Seriously I do.
The schadenfreude of saying, “We told you he was a maniac” won’t change the dismay we feel at watching the orange loon running around the world with scissors.
I have removed all my money from the stock market. I have no idea what will happen. It seems much safer to me. I wonder what would happen if every democrat removed their money from the stock market?
There are additional factors which may shake up the long end
-Banks nursing $500bn unrealised losses in HTM portfolios which the smaller ones haven’t capitalised
-Issuance profile very T-Bill heavy, so long end should actually be even cheaper
-China is booking substantial US Treasury holdings…
.. in BE and Lux and not clear whether, being cautious, they want to go long duration
So a sensible administration should be careful. The noise Trump make wrt tax cuts, crypto, wars and his history of defaulting add to an already volatile mix.
"But, you may ask, if bond investors are starting to worry about the madness of Trump 2.0, why are stocks up?"
As I recall, stocks went up after '82 and for the rest of the decade even while long-term rates remained in the 8-10% range. Never forgot my first mortgage in '87: Thirty years at 9.75%.
I just bought a bunch of treasury bonds. I’m planning on taking full advantage as long as these rates last. I have no debt so I don’t care if rates go up. In fact I hope they do. I didn’t vote for this insanity.
Thank you Prof. Krugman for your thoughtful analysis. Trump is a maniac who is surrounding himself with people who worship his every word. I can't think of any reason to expect anything other than the absolute worst from the coming administration. After all, he's got a mandate, right? 😉
The divergence started before Nov. 5. Perhaps the yield curve inversion was over done, and Fed's cuts started a de-inversion. That's enhanced by Trump's threats (inflationary). The ISM Services report just released did show a big price bump, presumably indicating pre-cautionary moves by businesses.
Comments
If Trump crashes global trade with his tariffs the market for bonds will dry up and yields will go through the roof.
Trump's blustering may cause European gov'ts to ++ defense spending, but chances are they'll stop buying American and hedge risk by boosting domestic R&D.
The U.S. runs large trade deficits under current policy (which is good) and a huge chunk of those dollars get plowed back into the bond market.
The tariffs and protectionist policies Trump wants will tend to reverse that over time and crater the bond market.
https://wolfstreet.com/2025/01/05/status-of-us-dollar-as-global-reserve-currency-usd-share-drops-to-30-year-low-central-banks-pile-on-other-currencies-gold/
JFC! 🤦♂️
Trump: “Yes I am!”
‘Sources: “Trump isn’t as crazy as he looks.” Trump: “Yes I am!”’
Americans don’t want to believe that Trump is as bad as he seems…as bad as he insists he is.
On CNBC just after the election, the host was plaintively asking “did Trump mean it? What will he do?” Just clueless.
-Banks nursing $500bn unrealised losses in HTM portfolios which the smaller ones haven’t capitalised
-Issuance profile very T-Bill heavy, so long end should actually be even cheaper
-China is booking substantial US Treasury holdings…
So a sensible administration should be careful. The noise Trump make wrt tax cuts, crypto, wars and his history of defaulting add to an already volatile mix.
Many people are saying: “Trump isn’t as crazy as he looks.” Trump: “Yes I am!”
As I recall, stocks went up after '82 and for the rest of the decade even while long-term rates remained in the 8-10% range. Never forgot my first mortgage in '87: Thirty years at 9.75%.