Bond Yields Crash On ISM Report, More China Tariffs: Inversions Strengthen

-edited

The long end of the yield curve continued its post-FOMC decline on poor manufacturing reports and new Trump tariffs.

Bond yields were already in steep decline today on ISM news. Trump goosed the market with additional tariffs on China.

Fed Gets Unwanted Reaction

The Fed cut interest rates yesterday in hopes of steepening the yield curve. I noted Fed Gets Opposite Response It Wanted: Inversions Strengthen

Inversions continued to strengthen today on Manufacturing reports: ISM and Markit PMI On Verge of Contraction.

Even before Trump's tariff announcement, I commented that "I Expect Contraction Next Month." Click on the link for my reasons.

A global manufacturing recession has already started. Trump's unwise move increases the odds of an economic recession soon, assuming it has not already started.

Mike "Mish" Shedlock

Comments (34)
No. 1-9
Mish
Mish

Editor

Traveling today to the North Rim of Grand Canyon. Reception poor.

ZZR600
ZZR600

So economic contraction begets DEFLATION, begets lower interest rates in an attempt to increase INFLATION, begets negative yielding bonds, begets DEFLATION, begets even LOWER interest rates, begets even MORE negative yields......where the hell does one invest in this scenario???

Tony Bennett
Tony Bennett

30yr bond yield down 9 bps (atm). Impressive.

Matt3
Matt3

The Fed seems to only be able to control the short end of the yield curve. If this is true, then the market is setting rates further out. Therefore to understand what is priced in the future, we can ignore the short (manipulated) portion of the curve. So what is the market telling us with low rates 5 -10 years out in the US and with negative rates in many European countries? Do inversions mean much now that we are in a new world of negative rates?

Carlos_
Carlos_

Well there you are Trump the stable genius who has run every business to the ground is about to do the same to the US MAGA! The other stable geniuses that kept telling the exerts of the time are: Hitler telling his generals how to fight a war Chavez telling economist how to run the economy

I know how this movie ends

Augustthegreat
Augustthegreat

Trump has proved once again that he is probably the greatest president ever! What a genius!

Casual_Observer
Casual_Observer

Mish you use to look at things from a macro-perspective. Whatever happen to that ? The reason the Fed is cutting is because 4T of bonds are set to reset over the next few years and cause a major problem unless they reset at a lower rate.

wilintopia
wilintopia

I find it curious that Trump pulled the trigger on new tariffs on Chinese goods at such an early stage of the restarted trade talks, but just one day after Powell displeased him with what he considers to be too meager a rate cut. So, is this how Trump renders Fed decisions on rates irrelevant...knowing that an escalation of the trade war will cause rates to plummet, and probably to a greater extent and more rapidly than the measured pace at which the Fed likes to proceed?

Tater-Man
Tater-Man

Too many people here think buying the long bond is a sure thing.

The basic yield does not cover CPI, much less the actual cost of living. Then you have to subtract taxes on the yield, so you are losing money year after year, straight out of the gate.

Ah, but the short term thinkers tell us they are investing in Miami condos for the capital gain, not for the income. Long bonds will appreciate as yields collapse. Its a sure thing, as sure a thing as the condo flippers pre-2008.

What happens if the economy picks up again? Bonds get destroyed.

What happens if the economy stays soft for decades like Japan, you get your just principal back but its worth less because coupons didn't even cover CPI. The price appreciation goes to zero when the bond matures in 30yrs.

Ah again! The smart alecks tell us they will flip their condos -- I mean long bonds -- to a bigger sucker before the &*_) hits maturity. Who are these suckers, and what makes you think they are going to buy this garbage from you when and if the US government gets its act together? What makes you think everyone else isn't going to want to dump their condos and long bonds when you do?

They say history doesn't repeat, but it often rhymes. Yesterday's "sure thing" condo flippers are today's "sure thing" long bond buyers

If history is any guide, bloated governments also default on their debt -- which over a 30 year horizon is well within the possible scenarios for US Treasuries. If baby boomer parents were always good for the money, does not mean boomers or millennials will do the same. Actually, history suggests they will default even though their parents taught them better. See every major empire throughout human history for examples.

But lets assume Uncle Sam defaults on Social Security but somehow doesn't default on Treasury bonds too. Will everyone flip their worthless condo at the last minute, or will a lot of people be left holding the empty bag?