Long-term bonds don’t care about inflation
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Welcome back. inflation It’s getting hot again, and the bond market has also done something. Some thoughts on the following things. For those who are tired of repeatedly trying to project a complete description of the world economy onto the poor U.S. yield curve, I have also added more thoughts about competition. Email me: [email protected]
The bond market is a little concerned about short-term inflation, but not long-term inflation at all
The consumer price index in June rose 5.4% from a year ago, even faster than the increase in May, and the stable “core” part of the index rose 4.5%. These are big numbers. However, within a few hours after the release of the CPI report, the yield on the 10-year US Treasury note basically did not respond, which is very interesting. When inflation rises, bond yields should rise, because inflation is bad for bonds.
After the weak demand for the 30-year Treasury bond auction in early Tuesday afternoon, the 10-year Treasury bond yield did indeed fluctuate rapidly. Long-term bonds seem to have become quite selfish: they don’t seem to care much about inflation, but they do care that people don’t want to buy them.
Even so, the 10-year Treasury bond yield is still not higher than a week ago. However, the two-year bill did immediately respond to information about inflation:
what should we do? My best guess is that the market is saying something like this:
“Inflation looks mostly temporary, but it is enough, and short-term growth looks good enough. The Fed will have to reduce bond purchases for a period of time and then raise short-term interest rates, so short-term yields need to rise slightly. But these Fed’s The move is almost certain that inflation will not get out of control, and indeed, economic growth will not be so good from now on, so there is no need to raise long-term bonds because of inflation risks. However, long-term yields are very unattractive here.”
Now, this is indecent, but it fits the facts we have. This does not mean it is right. I think inflation can be tricky after all; we just don’t know. But there is some evidence that the market’s obvious assumptions.
At the point that “inflation appears to be temporary”, the price increase in June was again largely driven by factors related to the reopening.Matt Klein in Overshoot There is a nice graphic:
Given that growth in the coming months is still not so strong, it seems that Covid-19 will indeed continue to be a headwind for the global economy. The Delta variant is terrible. Eric Topol of Scripps Research used data from Our World In Data to post this chart of mortality in low-vaccination countries on Twitter. The tragedy is:
This is the evidence. There are also emotional issues, which are usually more important. July Bank of America Fund Manager Survey display The proportion of fund managers who believe that the economy will continue to improve from here has fallen from 91% in March to 47% now. The market is below and above. The market was in chaos in March. It feels a bit boring now. Perhaps long-term bonds still have room to rise.
Competition, part 2
I still don’t know whether weak competition is a problem in the US economy (and a boon to some major US companies). It is obvious that a small number of companies make most of the profits, and industry concentration—at least at the national level—is rising. But the link between these points and the lack of competition is uncertain.
My mailbox provides some more relevant facts. Duncan Lamont of Schroders sent the following graph showing the steady decline in the US government’s competition enforcement actions. I have seen some charts like this, but this one usefully breaks different types of surveys. The United States is still investigating mergers (even if it did not prevent them), but it hasn’t bothered about monopolies for a long time, and competition investigations (according to Article 1 of the Sherman Act, which prohibits collusion between competitors) have become rare:
It may be because there are fewer executions, so fewer executions. But it is clear that the largest and most profitable companies have been making a large number of acquisitions-according to Oliver Jones of Capital Macros, by the 2010s, Amazon, Apple, Google, Facebook and Microsoft were making acquisitions about once a week. He sent a note that included the following chart:
Jones wrote of the large-scale acquisition:
… In the antitrust system before the 1980s, this was impossible, and preventing it from continuing is a key part of the current legislative work in the United States.I think that when potential competitors are still very young, you can buy their capabilities to make it easier for them [Big Tech] Consolidate their dominant position in a range of markets.
Jones pointed out that with the support of the two parties, the House Judiciary Committee has passed six antitrust laws. If they become laws, they will: a) prevent the acquisition of major online platforms; b) make it easier to split large technology companies; c) Prevent large technology platforms from giving preferential treatment to their products; d) Make it easier for users to leave large online platforms; e) Make antitrust cases easier to file; f) Increase funding for antitrust agencies (you can read the bill Here, Here, Here, Here, Here with Here.)
In addition, Big Tech pays low taxes by carefully positioning subsidiaries, so it loses a lot in the current situation Push Global tax reform. Jones wrote:
If the tax and antitrust laws currently in the pipeline are passed (if it is clearly still large at this stage), I think it will change the basic characteristics of the way the technology giants operate in the past ten years, weakening some of the key factors behind the continued high and continuous Rising profits supported their continued outstanding performance in the 2010s.
I should point out that even if the current loose law enforcement environment has contributed to the significant dominance of large technology companies, and changes in this environment may reduce the profitability of these companies, then still It does not prove that their dominant position reduces the competitiveness of the economy. More on this issue in the coming days.
A good book
My colleagues Laurence Fletcher and Tommy Stubbington wrote a great article sheet Regarding the difficult choices faced by band managers who claim to meet basic environmental, social and governance or ESG standards. Should they buy bonds from regimes with poor human rights records? The problem is that poor manufacturing is where the output is high. There is a touching passage:
Many emerging market investors point to a dilemma in the industry: If they avoid Belarusian bonds, what about other countries with dubious human rights records? Many people privately worry that if countries like Russia, Saudi Arabia or China are barred from entering, it will be difficult to make money.
Being ethical will hurt your return, at least sometimes, and sometimes it’s significant. Avoid people who are trying to tell you the difference.