INK Ultra Money: Are long rates headed higher?

Ted Dixon
Fri, 08/28/2020 15:25

In a pre-Jackson Hole interview, bond strategist George Goncalves paints a picture for bond bears that depicts how long-bond Treasury yields could head higher in the weeks ahead. While 2021 may well be a different story, the amount of Treasury supply about to hit the market may reveal a Fed that is willing to let the long end of the bond market steepen.That is a theme we have been discussing in our reports, including the August 19th INK US Market Report (Will the bond vigilantes save the banks?).

Today on Real Vision, Brent Johnson finds a soul mate in deflationist Steven Van Metre of Steven Van Metre Financial. The two describe a bullish bond scenario believing that the Fed's QE is deflationary, or at least non-inflationary. Van Metre appears to assume that banks who sell bonds to the Fed cannot use those reserves to buy more bonds. And while I more-or-less agree with him on that point, he appears to also be assuming that the banks are the only major players selling to the Fed. However, this is not the case.

As Pater Tenebrarum in an October 27, 2015 Acting-Man post points out, the Fed can also sell bonds to some non-bank primary dealers who are not deposit taking institutions. In those situations, the Fed would pay money into dealer bank accounts which would increase the money supply. When the check gets into the hands of the dealer's bank (which could be a parent), a reserve asset is created at the bank. Meanwhile, the primary dealer still has money in its account from the Treasury sale.

Between the two characterizations of the bond market on Thursday and Friday on Real Vision, I find the Goncalves one more compelling. For those who agree, make sure to watch our free August 27th morning report summary video (Insuring for a G-economy) which looks at iA Financial (IAG). Should the yield curve continue to steepen, the company's insurance business could benefit.

If you are not an Ultra member of the Canadian Insider Club, join us today to get full and immediate access to Real Vision videos on INK Ultra Money and to the many Canadian Insider features now reserved for Club members. Learn more about the benefits here. I encourage you to act now to beat a major Club membership price increase coming this fall. In a few days, the SAVE99 coupon will also be expiring. Use it at checkout now to save $99 on the first year of either a Club or Club Ultra membership.

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