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Wednesday, November 16, 2016

Premature Panic over Bonds

It's anyone's guess at this point what the incoming Administration will do. [I'm guilty, having indulged in speculation on trade policy and the auto industry in my previous post.] So why should each and every change in the economy be viewed as a reaction to Trump? Well, I suppose it's easier than thinking.

...don't blame Trump – yet...

According to headlines, bond prices have crashed over the past couple days. First, is that really the case? Second, there are many reasons for interest rates to change that have nothing to do with the election. If we look at the first graph, we do see a spike in yields over the past week. But rates constantly bump around, and remain within the range we've see over the past 12 months. Second, if we look at what the slope of the yield curve implies for what 1-year Treasuries will look like down the road, we're almost exactly where we were a year ago. That in turn is very little different from where we were two years ago.

We should remember that employment data suggest the economy continues to improve. At 152 million [Oct 2016] the level is 13 million higher than the 139 million of November 2010. In addition, the number working involuntary short hours fell by 2 million, and now is back to more-or-less normal numbers. That's 15 million new or improved jobs. Slack remains, but since monetary policy can take 18 months to have an impact – and a 25 basis point hike to 0.50% won't have much! – we should expect rates to rise sooner rather than later.

So don't blame Trump. Yet.


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