When interest levels were being cut in the US, a funny thing happened: they ended up being higher.
The US Federal Reserve lowered its benchmark interest rate by half a percentage point in September,  , raising expectations , that another levels may soon start coming along. Otherwise, the US Treasury’s two-year and 10-year information and the common 30-year lease rate have all risen by half a percentage point or more.
What happened? The Fed has limited authority over interest rates, which is the quick reply. The bond market, when well, has a lot to say about rates—the longer-term charges in particular, although no entirely.
The relationship economy’s” say” is a simple representation of supply and demand. The key is to comprehend that bond yields and prices move in the opposite direction: one moves off and the other moves down.
For example: If I buy for US$ 100 a bond that yields 5 %, I will receive$ 5 a year in interest. Let’s say I’m selling the bond to you and you only pay$ 90 because the demand is subdued and the supply is strong. You currently receive$ 5 in interest per year, but because you paid$ 90, your yield is 5.55 %. ( If, instead, you had to pay$ 105 for the bond, your yield would be 4.76 %. )
What’s happening, therefore, is that while the Fed is now trying to push prices down, ties are selling off and that’s driving costs higher. The question is: Why is the connection business negative?
There are at least two possible solutions.
Some experts blame what they’re calling the” Trump trade”. Although the surveys are a tossup, the industry think Trump is going to win the presidency. They also believe that a second Trump term will aggravate the trend toward higher inflation and worsen the already bad national debt.
Understand that the markets do n’t have a political agenda. Bond investors may be mistaken about the effects of a Trump success, as well as the success itself, but their predictions do n’t represent anti-Trump discrimination.
Their purchasing and selling of securities is based on what they think will happen in terms of prices. Lenders apprehension about being reimbursed in undervalued currency. Both candidates have pledged to provide tax breaks and freebies that will help with inflation, but academics believe Trump has already made those promises.
The business serves as the other justification for the ties selling off. The Fed’s September 18 price cut reflected an market that was scarcely creating 100, 000 new tasks a month. Some economists were predicting another half-point split at the Fed’s November meet.
But in early October the Bureau of Labor Statistics reported a 254, 000 increase in work in September, well above the 12-month regular, and Census revised some of the earlier times forward. Meanwhile, the inflation rate in September continued its downward march toward the Fed’s 2 % target but did n’t drop as much as analysts expected.
With those studies, a half-point November split by the Fed looked less good. One Fed official also expressed his willingness to avoid a split in November.
The November 1 report that only 12, 000 additional jobs were reported for October seems likely to be dismissed as being distorted by significant storms and the Boeing attack.
Financial businesses are forward-looking, they anticipate activities. In anticipation of the Fed’s September cut, owners had bought securities, which drove bond yields over. In light of the studies showing a stronger market and worse-than-expected prices in September, owners ‘ anticipation changed. If the Fed was n’t going to lower rates as much or as fast as expected, markets had to adjust.
It’s possible, of course, that the true answer is some mix of the Trump deal and expectations of future Fed price movements. The expectations solution is more normal. You’d have to wonder why then if shareholders were selling bonds out of concern for higher imbalances and prices. Bond traders have ignored decades of multi-trillion-dollar national budget deficits.
If those shortfalls are then causing bond traders to feel uneasy, it would represent a return of those who were known as the “bond vigilantes.” Bond investors ‘ concerns about federal spending three decades ago led to 10-year note yields falling from 5.2 % annually to 8 %.
Years later, the administration also managed to generate a budget surplus by working with Congress on plans to control spending. That it had to be pushed by the markets to do so caused a Clinton consultant, James Carville, to say – reportedly – that, if he could be reincarnated as anyone, it would be the relationship industry so he could scare everyone.
For farmers, ranchers and another business loans, the big question is where interest rates are going from below. The most probable course for them to take is, in my opinion, to fall, perhaps more quietly than analysts had predicted in September.
The US economy is robust, according to The Economist, and inflation is essentially under command. The present level of interest rates is much higher than current economic situations warrant, and if the economy continues to grow at this rate, which is very unlikely and if a rebound in inflation is possible but not specially unlikely.
If I’m correct about the economy, the Fed will continue to cut interest rates, perhaps just quarter-point cuts, and perhaps not at every meeting, but it will be closer to 3 % than 5 % over the long run.
The industry will eventually fall in line as the Fed moves in that direction, particularly if whoever wins the presidency is prevented from carrying out their most inflationary campaign promises by Congress, the relationship market, or a return to common sense.
Urban Lehner, a former Wall Street Journal Asia journalist and editor, is DTN/The Progressive Farmer’s editor emeritus.  , This , content,  , actually published by DTN on November 1, and now , republished by Asia Times with authority, is © Copyright 2024 DTN, LLC. All rights reserved.  ,  , Follow , Urban Lehner , on X @urbanize