The wizards at the Fed and US Treasury have been forced to acknowledge that their “transitory,” inflation is, in fact, quite “sticky.” And with the inflation elephant now acknowledged by the circus of high finance, Treasury yields keep inching up, recently reaching 4.7% — the highest since November. The Fed is stuck: It needs to raise interest rates to tame inflation and make Treasuries more attractive. But the Fed can’t afford higher rates, with an already-untenable cost to service the existing debt and loan-dependent industries teetering on the brink.
Consumers aren’t the only ones defaulting on their debts: Corporate bond defaults were up massively in 2023, especially for high-risk junk debt, and the trend is continuing this year at a pace not seen since the 2008 global financial crisis. Unsurprisingly, companies selling low-rated junk debt are being hit the worst.
The debt ceiling fight is getting down to the wire. In a letter to Congress on Monday, Treasury Secretary Janet Yellen said that without a debt ceiling increase, it was highly likely the government wouldn’t be able to meet all of its obligations by “early June, and potentially as early as June 1.”
Despite the drama, I still expect Congress to get a deal done. And that’s when the real problems begin.
Federal Reserve officials insist they can still shrink the balance sheet significantly more than they already have.
You can file this assertion under the same category as “inflation is transitory,” and “the problems in the subprime mortgage market are contained.”
In other words, Fed officials have detached from reality — again.
With the rate of increase in the CPI slowing, many people in the mainstream think the Federal Reserve is winning the war on inflation. In a recent podcast, Peter Schiff said this is wishful thinking. He said that the Fed is losing the war and it will ultimately surrender to inflation.
Schiff is not alone in his thinking. In a recent interview with The Market NZZ, investment guru Jim Grant argues that we have not seen the last of this inflationary outburst because inflation has become deeply rooted in the global financial system.
Are the people who are predicting a big economic crash right? Or are they just crying wolf? In this episode of the Friday Gold Wrap podcast, host Mike Maharrey explains why it’s hard to predict the exact timing of a crash even if you’re certain it’s on the horizon. He also talks about a couple of news items this week that caused the price of gold to yo-yo.
While most central banks around the world have tightened monetary policy in an attempt to bring price inflation under control, Japan has done the exact opposite. But in a surprise move, the Bank of Japan widened its target range for 10-year Japanese bond yields, effectively raising the interest rate.
The move strengthened the yen, put more pressure on a weakening dollar, and rattled the global bond market.
Interest rate hikes get most of the attention as the Federal Reserve fights inflation, but balance sheet reduction is arguably more important. And it’s not going well.
Since the Fed stopped buying Treasuries and started letting bonds fall off its books as they mature, the bond market has experienced increasing volatility and liquidity problems. In fact, there is already talk about the possibility of the central bank abandoning quantitative tightening.
The Fed faces a real conundrum. Bond yields continue to rise. The only thing that can stop it is a central bank pivot back to rate cuts and quantitative easing. But the Fed needs to raise rates and shrink its balance sheet to fight inflation. In this episode of the Friday Gold Wrap podcast, host Mike Maharrey talks about the bond market and Fed’s conundrum. He also goes on a little rant about taxes.
Earlier this week, the yield on the 30-year Treasury rose above 3% for the first time since April 2019 as the carnage in the bond market continues.
Rising yields have put pressure on gold. The yellow metal flirted with $2,000 an ounce but has since fallen below the $1,950 resistance. Once again, investors are fixated on rising interest rates, but missing the bigger picture — real rates remain deeply negative.
