Long-term yields for U.S. Treasuries should indeed firm but be tempered by a slowing as this phase of the economic cycle cools or even reverses. The good news is that’s not inflationary although higher import prices are, writes Gene Inger Monday night.

The bad news will be the effect of interest paid by the U.S. Treasury on existing massive debt.

That debt service combines with actuarial needs of pension funds, likely ramping-up cash flows as baby boomers retire. That provides fuel for demand in the long end of the U.S. Treasury market.  

Ah ha. That is the tempering meaning moves to meaningfully higher yields will take longer and might mitigate against a financial calamity.

Once S&P (SPX) finally corrects by 15%-20%, a massive inflow of capital to U.S. Treasuries is likely as investors run to escape portfolio carnage as algo-driven selling advances. (And the recent re-allocation won’t help but accelerate a bit of volatility when we get a sizeable break.)  

Landon Whaley: Headline risk says what? 38 of 43 global economies are slowing.

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The global economy has shown exhaustion signs after years of recovery, and the Submerging Markets remain descending trying to perk-up a bit.

If all this evolves into a U.S. recession it won’t matter how much the budget deficit is, or how many securities aren’t rolling over.  There will be debates about whether one can discount it before the event even if that’s prolonged a year or two, varying of course with trade and political near-term outcomes.

Bottom line: The prognosis for the long end of Treasuries is higher yields, but perhaps gradually. The ride to higher levels will be long and bumpier.

For example, any significant rally now might precede ensuing price decline as a counter-trend move, even if on the way to higher levels down the line. This portends an increase in credit market volatility not just for equities.  

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I leave this topic ahead of the Fed’s decision Wednesday with a reminder from an era long gone written by a Fed chairman of the time:

“A giant suction pump had by 1929 to 1930 drawn into a few hands an increasing proportion of currently produced wealth. This served then as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied themselves the kind of effective demand for their products which would justify reinvestment of the capital accumulation in new plants. In consequence as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When the credit ran out, the game stopped.”  

Mariner Eccles
Federal Reserve Chairman
1934-1948

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