Participation Rate Drop Not That Big A Deal

The 10-year U.S. Treasury yield (above) has been drifting higher, although it remains within a broad range that it settled into after the post-COVID Bond Apocalypse. Since I am not offering unsolicited investment advice to random strangers on the internet, I officially do not have a yield forecast. That said, the bond (price) weakness is somewhat surprising in retrospect given the economic uncertainty. However, the surprise factor is somewhat reduced by the reality that we now have a White House that is pushing almost every lever it can to raise prices. My bias is based on the post-1990 period where growth trumped inflation for bond yields — since inflation is a lagging variable. The difference is that we did not then have a lot of pro-inflation policymakers in power.

Random Observations

I have mainly been looking at my inflation manuscript. It seems to be in good shape, not entirely sure when I will pull the trigger on it. I updated the figures, and I will need to make sure that comments remain in sync with what is shown. (I started cutting down time ranges to historical periods to avoid issues with what is happening at the end of the chart.)

The U.K. Debt/GDP Ratio Is NOT Going To 1000%

The U.K. Office of Budget Responsibility (OBR) published its “Fiscal Risks and Sustainability” report (link) and it contains the eye-catching chart above. I will draw your attention to the top line which represents a “worse case” projection of the debt/GDP ratio marching merrily off to 1,000%. I do not expect to be able to pay off on any bets in 2076, but I find it safe to say that the debt/GDP ratio will not do that. Even the low end projection is implausible.

I will first explain why the high projection is nonsensical, which then leads to a discussion why any methodology that produces such a scenario is unsound.

North American Trade Hardball Soon To Heat Up

There was a suggestion today suggesting that President Trump will formally “withdraw” from the Canada/Mexico/United States free trade pact (CUSMA/USMCA) tomorrow (Happy Canada Day!). However, unless he radically breaks the rules (always possible), this is just moving the situation towards annual reviews with a potential dissolution in 10 years.

This was already expected to happen, as this gives more negotiating space for the Americans to try to aggressively ram terms down the Canadian negotiation teams’ throats. That said, the Canadian Federal Government is not exactly in a mood for giving ground to the Americans, and the economic outlook for the Americans going into midterm elections is hardly great, and a renewed trade war might not be welcome outside of the White House.

Forward Guidance Important? Yes And No.

I have returned from travels, and trying to catch up on things. The most important headlines have been about the situation in the Gulf of Hormuz, but I do not have anything new to say on that. The global economy seems to be coping with the reduced flow of commodities out of the conflict region, although the effects seem to be unevenly distributed. (Worriers will point out that inventories are getting low, but I really do not want to spend too much time arguing that oil pricing is wrong.) The story that has caught my eye has been worrying about “forward guidance.”

Yet More U.K. Bond Market Vigilantism

I have been getting ready to leave town, and so wrapping up other projects. The only thing that popped up in my internet browsing was the Return of the Bond Market Vigilantes, this time courtesy of a tweet on May 30th by the U.K. Green Party Leader, Zack Polanski. The short text was “We must stop being in hock only to the bond markets. No one voted for the bond markets.”

Bond Vigilante Musings

Bond vigilantes are a popular topic in financial media. Part of this is that most people find government bonds boring, and they would rather read about equities, which can have more exciting returns as well as more interesting company and sector specific stories. Bond market vigilantes who are about to discipline naughty governments creates a fun narrative hook to a market that is otherwise characterised by daily price changes of around 20 basis points.