If you are a bond market bull, it’s been a tough month. Let’s review what happened, why, and what’s ahead. 
Yield Change In Past Month
- 2-year: +49 Basis Points
- 5-Year: +55 Basis Points
- 10-Year: +46 Basis Points
- 30-Year: +38 Basis Points
And to add more injury, 30-year mortgage yields rose from 6.87 percent to 7.37 percent as of yesterday, down to 7.30 percent today according to Mortgage News Daily.
That’s a rise of 43 basis point from a month ago to today.
US Treasury Yields Monthly Average
This is the worst bond market selloff ever in percentage terms.
For over two years I have heard nonsense about rent, Owners’ Equivalent Rent (OER), etc. and how it’s “lagging”.
OK but lagging to where?
Ominous Technical Trends
On April 3, I noted Ominous Technical Trends for US Treasury Bulls, Three Durations
Technical patterns on 2-year, 10-year, and 30-year US treasuries all suggest yields are heading higher.
The yield on the 2-year note was 4.7 percent at the time. Yesterday it hit 4.97 percent. The technical pattern broke in the expected direction.
The CPI Rose Sharply in March
The CPI rose 0.4 percent in March. Rent is up another 0.4 percent in March with gasoline up 1.7 percent. Together, the pair was about half of the total rise.
For discussion of the above chart, please see The CPI Rose Sharply in March Led by Shelter and Gasoline
Yet Another Groundhog Day for Rent
I repeat my core key theme for over two years now. People keep telling me rents are falling, I keep saying they aren’t.
Rent of primary residence, the cost that best equates to the rent people pay, jumped another 0.4 percent in March. Rent of primary residence has gone up at least 0.4 percent for 31 consecutive months!
The “rents are falling” (or soon will) projections have been based on the price of new leases and cherry picked markets. But existing leases, much more important, keep rising.
Only 8 to 9 percent of renters move each year. It’s been a huge mistake thinking new leases and finished construction would drive rent prices.
The overall CPI and core CPI Joined the party this month, all rising 0.4 percent.
Not Transitory
For at least a year, with nearly all the analysts telling me that rent is lagging and we were headed for a soft landing, my view has been the decline in the rate of inflation is what’s been transitory.
CPI Year-Over-Year
We have heard nonsense about a soft landing for a year.
In June, the year-over-year CPI fell to 3.0 percent. Since then it’s been trending higher.
Allegedly that’s OK because “rent is lagging”, a message we have heard for 2 straight years!
I keep asking, lagging to where?
CPI Month-Over-Month Rent and OER
OER stands for Owners’ Equivalent Rent. It is the price people would pay to rent a house unfurnished, without utilities.
People keep repeating the myth that OER is based off the question “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”
That is false. Rather, that silly question is used to help set CPI weights, not prices. Prices are real measured prices of rent.
Treasury Yields
Let’s investigate US treasury debt issuance by month and year.
For discussion, please see How Much Treasury Issuance Does the US Add Every Month to Finance Debt?
Pending in Congress
President Biden along with warmongers in both parties want to spend another $100 billion on Ukraine and Israel with no strings attached.
What’s Ahead?
Rather than woodenly pointing out month-after-month that rent is lagging (it is, but to where) please ponder a few things.
- The Inflation Reduction Act (IRA) is inflationary.
- Biden’s energy policy is inflationary.
- Biden’s regulations are inflationary.
- Both Trump’s and Biden’s tariffs are inflationary.
- The pending increase in the Child Tax Credit, approved by House Republicans and universally supported by Democrats, is inflationary.
- Biden’s student debt cancelation escapades are inflationary.
What About Demographics?
Due to age demographics, I expect employment in age groups 60 and over to decline by about 12.5 million.
I go over the math as to how I arrived at 12.5 million in my post In the next 5 years employment in age groups 60+ will drop by ~12.5 million
Three Key Implications
- Expanded need for more Medicare
- Expanded Social Security payments
- Decreasing productivity as boomers are replaced by unskilled zoomers
All three points are inflationary.
There are some deflationary aspects as well, For example, boomer deaths will create an increase supply of homes for sale by heirs, but that comes later.
The inflationary aspects are here and now.
The Fed’s Big Problem
In case you missed it, please see The Fed’s Big Problem, There Are Two Economies But Only One Interest Rate
Summation
The inflationary pressures include demographics, the IRA, energy policy, regulations, tariffs, child tax credits unless the Senate kills that, and another unconstitutional push by Biden for student debt cancellation.
That is counterbalanced by the phrase of the day: “Rent is lagging.”
I don’t doubt one bit that a recession is coming. But the ensuing decline in inflation, if any, will be transitory for all of the reasons stated above.
Excellent article here:
—–
Our Inability to Predict Inflation Is an Embarrassment to Economics
April 12, 2024, 3:00 p.m. ET
By Peter Coy
We were surprised when inflation rose. We were surprised when inflation fell. And we were surprised again when inflation stopped falling. The message of all these surprises is that we — including professional economists — really don’t have a strong grasp on why prices go up and down.
The shakiness of our understanding is no small problem because inflation matters, a lot. A big reason President Biden is lagging in the polls is that voters, rightly or wrongly, blame his policies for the inflation surge of 2022, when the annual change in the Consumer Price Index briefly hit 9.1 percent. The Federal Reserve is so intent on getting inflation down to its 2 percent target that it’s risking a recession by keeping interest rates high.
Aside from those practical considerations: If we don’t understand inflation, then we also don’t truly understand anything else about the business cycle (if there even is one), because growth and inflation are intertwined.
I happen to think the stock and bond markets overreacted to the higher-than-expected increase last month in the C.P.I. that was reported this week, which to me looks more like a blip than a serious reversal. But I admit that I don’t know for sure. Nobody does.
…
link to nytimes.com
Ah yes. The decline in inflation that is coming is in fact likely to be transitory. But it is likely to be quite deep. Interesting that a commentator who correctly called the deflation or low inflation of the last 15 years is now on the inflation bandwagon. And yes with 2 or 3 of what I identiify as the 7 primary dynamics of inflation going out of deflation mode the pressures of the last 10 or 15 years are changing. Interesting.
“Subprime is contained.” “Inflation is transitory.” “Bidenomics is working.” “Come on man!”
But the U.S. $ is still riding high because Sheila Bair (assessment fees on foreign deposits) and Jerome Powell (eliminating reserve requirements) made the E-$ market more expensive.
I don’t know but maybe we should tax the transfers of cash from the U.S. to Mexico, Latin America, Nigeria, Italy or anywhere for that matter as I have seen how it works. Work here, send all your $s to Mexico etc etc and then apply for food stamps, section 8 etc etc
And I do not mind helping people out with any of those social benefits, what I do mind is your parents buying a nice house in Mexico while you live off every American Taxpayer that chooses or is not eligible to apply for those benefits.
And if that sounds racist I really don’t care. That is exactly what is going on.
see: Recent developments in bank deposits | FRED Blog (stlouisfed.org)
Link: George Garvey:
Deposit Velocity and Its Significance (stlouisfed.org)
“Obviously, velocity of total deposits, including time deposits, is considerably lower than that computed for demand deposits alone. The precise difference between the two sets of ratios would depend on the relative share of time deposits in the total as well as on the respective turnover rates of the two types of deposits.”
The ratio of transaction deposits to gated deposits has reversed by 18%. That has raised the growth of N-gDp.
This too shall pass……………
The 2-10 year bond has been inverted for nearly 2 years now, and no recession. Is this the first time ever?
Curve inverted in November 2022. It has been therefore about 18 months. Time from inversion to Recession is anywhere from 7 to 27 again roughly. Story is not over.
I won’t and wouldn’t touch a bond from a soverign government moving closer and closer to default/ insolvency that has NO risk premium built in. For the U.S that’s probably 10% today. Maybe that’s why the FED is having a harder and harder time funding the treasury. The credit agencies should keep lowering the U.S rating down to where it belongs at B
There are a lot of investment vehicles, including bonds. And one can make money in all of them.
Personally, I prefer stocks. But to each, their own.
Still raising cash as I sold a bit more into strength this morning. Looking to reinvest on any pullback.
Franz Pick perfectly described bonds as “guaranteed certificates of confiscation.”
Yup, And: “People are brainwashed”. “The fact is that the destiny of every currency is devaluation and expropriation.”
Rising rates is useless if money printing machine is at full speed…
The corrupt Fed could stop buying USTreasury bonds and government spending would come to a dead stop.
And the FRB-STL also has the right idea:
link to files.stlouisfed.org
Under monetarism, the first rule of reserves & reserve ratios is that all money creating, depository financial institutions (DFIs), should have the same legal reserve requirements, both as to types of assets eligible for reserves, as well as the level of reserve ratios.
There is no reason for differential reserve requirements in the first place (something Nobel Laureate Dr. Milton Friedman advocated, December 16, 1959).
Policy should limit all reserves to balances in the Federal Reserve banks (IBDDs), & have UNIFORM reserve ratios, for ALL deposits, in ALL banks, irrespective of size.
In 1931 a commission was established on Member Bank Reserve Requirements. The commission completed their recommendations after a 7 year inquiry on Feb. 5, 1938. The study was entitled “Member Bank Reserve Requirements — Analysis of Committee Proposal” its 2nd proposal: “Requirements against debits to deposits”
link to bit.ly
After a 45 year hiatus, this research paper was “declassified” on March 23, 1983. By the time this paper was “declassified”, Nobel Laureate Dr. Milton Friedman had declared RRs to be a “tax” [sic].
Dr. Daniel L. Thornton, May 12, 2022:
“However, on March 26, 2020, the Board of Governors reduced the reserve requirement on checkable deposits to zero. This action ended the Fed’s ability to control M1.”
That’s right, and that’s why the FED can’t slow QT.
Does it signals that the “markets” despite spending a bundle on back-to-ZIRP baiting, started believing that Jerome means it with higher for longer?
Hopefully that’s the case and stop wasting money on with “expert” opinion pieces.
How the Libertarian dream in Argentina is going so far:
link to msn.com
Gave the outcome a lotta time did ya?
You expect me to click on a link to a pinko commie literal liar propaganda rag?
What does this have to do with Mish’s post? I’m failing to see the connection.
What’s ahead better be interest rate increases. To do otherwise will fan the flames of inflation even further.
The FED/government also ought to do a series of PSA’s reminding people that 5% is not an abnormally high interest rate number.
It’s all perspective. 5% was dirt cheap when rates were falling from double digit highs. 5% today is abnormally high when compared to 0% just a few years ago.
Home buyers are kicking themselves for not buying a few years ago when rates were low. None of them are thinking they got a good interest rate.
Rising interest rates are irrelevant to bondholders unless they’re traders.
Buy-and-hold bond investors benefit when rates go up since every rollover means more income.
After the inflation reports, this is just the bond market doing the Fed’s work for them.
Non sense. Guess what the NAVs are of those investors who loaded on 30 year bonds when they traded under 1%?
We don’t do mark to market any more. The face value is all that matters.
FWIW, my bond portfolio is overwhelmingly short term. I might shift to medium term when I think the market is as good as it gets,
Sadly, at my age long term bonds are no longer of any interest. I wonder if demographics are having a noticeable effect on the bond market?
“…The pending increase in the Child Tax Credit, approved by House Republicans and universally supported by Democrats, is inflationary…”
Saw this regarding the child tax credit expansion. Supposedly the bill is on life support in the Senate.
link to nbcnews.com
So are the continuing price increases by corporations who are collectively giving the middle finger to Biden.
How’s that related to me simply pointing out that child credit expansion may not happen?
Did anyone else notice silver almost hit $30 today, but then pulled back to $28 with the market sell off?
Bitcoin is down 5% today. Time to load up while the price is a bargain ($67,000).
Bitfraud is going to ZERO
Yea sure go load up
Bitcoin is fiat money for geeks and those who want to be trendy.
USTreasury are getting credit risk priced into them. College professors who increase tuition by double digits every year (for decades) are the only ones still clinging to the “risk free” diatribe.
The folks in DC think (or at least stated their plans to…) they are going to run $2 trillion spending deficits in perpetuity. That’s SPENDING deficit that matters, the BUDGET deficit is a fantasy. If anything, the $2 trillion (in current dollars) will increase massively as boomers try to collect social security and medicare having abused their bodies “go big or go home”.
Agree with Mish that Zoomers are not in a position to replace productive workers … they need to be de-programmed from the cult of woke first, then they need to be “edu-micated” with reading, writing, and arithmetic. Believe it or not… 1+1 = 2, always. Even if you feel triggered, even if you identify as a non-binary armadillo.
Everyone talks about STEM. Everyone says AI (which has lots of matrix math) is the future. Meanwhile Uncle Sam’s tax base thinks 1 + 1 is a matter of opinion?
A government with a decrepit tax base, massive existing debt, massive unfunded domestic promises, and a complete lack of credibility … is not, and cannot ever be “risk free”. The most expensive public education system in the world has failed.
In many third world countries, private companies with good cashflow (especially in “hard” currency) can borrow at lower rates than the sovereign.
The US government (both parties are guilty) is simply not credible, and interest rates are going to reflect that.
As someone said years ago…”You can’t bullshit math”
PS…love the ‘non-binary armadillo’ quote. That’s a good one.
A 4-6 month bond bull market is about to begin any day. The bear market that ended in November 2023 has not spent enough time or price/yield correcting.
I’m seeing waterfall action in the stock markets. Bollinger bands are opening and the price is following the lower band. Stochastics have been overbought for months, and have just dipped into lightly oversold.
“Blue Horseshoe loves Anacott Steel”
When there is no disposable income left we will hit our inflation target!
DOWN with them fckn rates ! Stocks only way should be up ! , The cheap debt funded house of cards has got to be propped up till the end of times …..which might in fact be nearer than we ever imagined if the deluded west keeps on pushing things…
Saw this article yesterday. It’s clear that as always, there are a percentage of people who got left standing when the (low interest rate) music stopped.
So sad
Yes. Rates matter. Especially in the real estate market when mortgages rates are twice as much as they were a few years ago.