As we begin our discussion of the yield curve for sovereign debt, it is important to understand who actually owns US Treasury debt.
Of course, The US Federal Reserve owns the largest share of US Treasury debt outstanding, followed by China and Japan.
Following Japan, tiny Belgium and the even tinier Caribbean follow in 4th and 5th place. Belgium has become a financial center for Treasuries owned by other countries, or that it at least has become a transit point for them (for example, Euroclear).
Then there is the Caribbean (El Caribe). These are largely off-shore banks investing on behalf of American and foreign investors.
Now to the US sovereign yield curve, a measure of yield by maturity. It is currently upward sloping (longer maturity bonds and notes have higher yields than shorter maturity bills and notes).
The US (green) and the UK (blue) have the highest sovereign yields among a group from Europe and Japan. France (red) and Belgium (orange) have lower sovereign yields, followed by Germany (purple) and Japan (pink).
The relatively higher US Treasury yields has resulted in a relatively higher Fannie Mae current coupon for their mortgage-backed securities. The following chart is the spread of the Fannie Mae current coupon against the popular 10 year Treasury yield.
C’mon! Sing a-long! “Yo ho, yo ho, a pirate’s life for me!”
Federal Reserve Chair Janet Yellen spoke this morning at the annual monetary policy cavalcade at Jackson Hole, Wyoming … where the Elite Come To Meet!
The end result? The Treasury 10y-5y curve flattened to its lowest level since early January 2009.
Here is the yield curve for today versus January 1, 2009.
Of course, a flattening yield curve is NOT a good sign for the global economy, where investors run for safety in the US Treasury Markets. And is reflected by the fact that this Jackson Hole cavalcade is the first won that was followed by a DOWNTURN in the S&P 500 index.
Yes, life is tough at the monetary cavalcade in Jackson Hole!
The Federal Reserve began their extraordinary bond and mortgage market intervention in 2008. Although bond and agency mortgage-backed securities have been slowing (aka, tapering), The Fed is still manipulating interest rates and propping up asset prices (like the S&P 500 Index and house prices).
Here is a chart of the S&P 500 stock market index against The Fed’s balance sheet expansion.
And here is the Case-Shiller 20 metro house price index against The Fed’s balance sheet expansion. Note that house price growth at a national level didn’t really kick in until 2012 due to the foreclosure crisis and the overhang of foreclosed homes.
Now, if I divide the S&P 500 index by the Fed Balance sheet, we didn’t a different picture of the stock market without Fed intervention. That is, …, no recovery.
It is even worse for the Case-Shiller house price index. Sans Fed intervention, house prices would continue to fall.
The Fed’s massive intervention has successfully masked how poor the “recovery” has been. These charts are more closely associated with the decline in M2 Money Velocity that we have seen.
Instead of Don Ho’s “Tiny Bubbles,” The Fed is blowing BIG bubbles. Especially since income growth has stagnated.
We have good news from the New York Federal Reserve. Delinquency rates on debt are the lowest since Q3 2007. With the exception of student loans, of course.
Unfortunately, wage earnings are stagnant along with lower real median household income.
Despite the stagnation of wages since 2009, bank credit is expanding at a much faster rate than real average earnings growth (which is 0%).
This is a dramatically different credit cycle than during the housing bubble. This is a stagnant wage credit recovery.
We shall see how this plays out. But this is a low money velocity “recovery.”
Mark Twain and Charles Dudley Warner published The Gilded Age: A Tale of Today in 1873 where they satirized what they believed to be an era of serious social problems disguised by a thin gold gilding. In this case, using monetary policy to increase wages and family income disguised by gold gilding the form of asset price appreciation.
The serious social problem? Fed policy hasn’t worked in improving wage income growth or real median household income. We have declining real median household income (toxic green line) and 50% lower hourly wage growth (putrid pink line) since the advent of Fed intervention.
It gets worse. According to Bank of America, credit card spending is slow to recover, but the reasons mentioned above.
And the use of revolving credit is declining. For the same reasons.
I am sure that Mark Twain would be amused by the second coming of The Gilded Age. This one by The Federal Reserve system.