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Also of note: this decline only continues as long as the Fed actually cuts rates. If they don't, these long-term bond yields make no sense (why would you lend

Also of note: this decline only continues as long as the Fed actually cuts rates. If they don't, these long-term bond yields make no sense (why would you lend money for 10 years at 3.5% when you can lend money for 3650 successive 1-day terms at 4.75%?) The logic behind this seems a bit circular to me. Market participants accept lower long-term bond rates because they expect the Fed to cut rates in the future. They expect the Fed to cut rates because if they don't, there will be a financial crisis. There will be a financial crisis because long-term bond rates are high and banks are underwater on their bonds, except that bond rates are declining because the Fed is going to cut rates, because...uh, why is there going to be a financial crisis again? What reason does the Fed have for dropping rates? It's very much an "appeal to consequences" fallacy - some bad outcome is not going to happen because that would be bad. The world doesn't work that way. IMHO the market is wrong, and the Fed is not going to cut rates. They've gotten too accustomed to being bailed out, and the Fed is on to them, and so they're not going to do that again, at least not in the form that the market expects.

gerad 4y ago
Because there’s no guarantee rates will stay at 4.75% for 10 years. Getting 4.75% for 1 year and then 0% for the next 9 years is objectively far worse than getting 3.5% for 10 years.
akashshah87 4y ago
This is not true. If the bonds are held to maturity, there are no losses.
- naveen99 4y ago
  Opportunity costs of missing temporarily higher interest rates while bonds are locked up.
rcme 4y ago
The Fed is projecting rate cuts next year. As of March 22nd, the Fed is projecting a federal funds rate of 4.3 in 2024 and 3.1 in 2025, with 2.5 in the “longer run”. Hard to say the Fed won’t cut rates when their own projections have them cutting rates.
- mullingitover 4y ago
  They were also projecting rates would be low before they suddenly weren't. If the Fed projections were reliable, banks wouldn't be in this situation.
  - JumpCrisscross 4y ago
    > Fed projections were reliable, banks wouldn't be in this situation SVB didn't do anything to hedge its duration even well after the "inflation is transitory" period was over.
  - rcme 4y ago
    My point was more that the Fed wants to keep rates as low as possible. The person I was responding to was implying the Fed would choose not to lower rates even if they could to avoid “bailing out” the banks.
    - TinyRick 4y ago
      Why does the Fed want to keep rates as low as possible? Their mandates are to provide price stability and maximize employment, not keep rates as low as possible. Unemployment is very low so they are doing well in terms of maximizing employment, but inflation is still running hot, so the logical thing for them to do is keep rates high enough to stave off continued inflationary pressures.
      - rcme 4y ago
        The Fed wants to keep rates as low as possible because their mandate is to keep inflation at 2% and maximize employment. If inflation is at or under 2%, then lowering rates will increase economic activity and increased economic activity will reduce unemployment.
        nostrademons 4y ago
        The unemployment rate is now 3.6%, about the lowest it's ever been. Where are these workers going to come from? The Fed has been very explicit that they need to tighten labor market conditions. "Tighten labor market conditions" = "cause layoffs". That's how it works, they just can't say it out loud because it'll spook people. They can't bring down inflation until they raise rates high enough that companies start going under, and they have no incentive to lower rates unless actual bad things are happening in the real economy. (Remember also that when rates are high, the Fed has more room to cut when actual bad things do happen, because there's a floor at zero.)
TinyRick 4y ago
Spot on. Listen to the language the Fed uses and this is the clear answer, recently they have been saying things like "we still have a lot of work to do on inflation", "the banking sector is resilient", etc.
- kjksf 4y ago
  This is the same FED who said "inflation is temporary" and then hiked rates like krazy. I'm not saying this is proof that they won't hike rates, just that what they say should be heavily discounted. They might just pivot on a dime. What I find interesting is that literally everyone is saying that FED is wrong. Like find me anyone outside FED that says: yeah, rising rates is good. Granted, many people who comment (wall street) have self-interest in rates being low but I don't think there's any notable economist who isn't critical of FED.
  - TinyRick 4y ago
    FWIW I'm not suggesting that the Fed should or will continue to hike rates. I think they are going to pause rate hikes in the near term and wait for more data to ensure inflation does not become entrenched. The parent comment I replied to said "the Fed is not going to cut rates" which I agree with - but I also don't think they are going to hike rates either.
sdwr 4y ago
> The world doesn't work that way. The world does work that way! Most people don't want bad stuff to happen, and will take action, coordinated or otherwise, to prevent bad stuff from happening. To me, sounds like the Fed is trying to slow this thing down without spooking people. So, promise to cut rates soon, then see what people can actually tolerate, and maybe leave them high enough to chafe a bit.
Y_Y 4y ago
Because rate won’t be 4.75% in 3649 days? If you want a rate guaranteed for 10 years you have to pay for that. Maybe it's not worth it to you today but if the rates drop as expected you might look smart for locking in a good return while the going was good.
- nostrademons 4y ago
  What's the mechanism for that drop? The Fed doesn't just drop interest rates when everything is going well in the economy. The usual trigger is that some exogenous crisis happens like the Asian financial crisis, the global financial crisis, or COVID-19, and then the Fed drops to stimulate economic activity. Take a financial crisis out of the picture, because everyone who assumes there will be no financial crisis is explicitly taking a financial crisis out of the picture. Why would the Fed drop rates?
  - kjksf 4y ago
    For one there's an election in 2024. High interest is killing stock market returns. No administration wants to enter election season with decimated stock market. Hence, if nothing else, there will be political pressure on FED to lower interest rates to juice up stock market. Second, some kind of recession is expected by many so if it happens, that will a reason to cut rates.
    - lesuorac 4y ago
      [Citation Needed] The fed historically does take actions adverse to employment in election years. https://www.advisorperspectives.com/commentaries/2016/08/25/fact-32-of-our-past-60-rate-hikes-were-in-election-years https://www.advisorperspectives.com/commentaries/2016/08/25/...
    - ac29 4y ago
      > High interest is killing stock market returns. The stock market (as measured by SP500) is down only 15% from its all time high, and is currently higher than any point before 2021.
    - 4y ago
kypro 4y ago
It makes more sense when you consider that the market has never believed long-term inflation was a serious issue because frankly the narrative around structurally higher inflation has never made much sense given demographics, technology and debt levels. For the most part where the uncertainty has existed has been in the path of the Fed. For the last several months (since Jackson Hole) markets haven't been sure how quickly inflation would come down and therefore how high the Fed might risk taking rates. But today we have much more certainty. We now know the Fed really can't raise rates much more near-term given the risks and longer-term the stimulus and supply bottlenecks which created the majority of the inflationary pressures will ease. Another thing you need to remember is that inflation easing is actually deflationary because real yields are calculated by nominal yields minus inflation. So as inflation comes down you're actually getting paid more to lock your cash up in bonds which continues to tighten financial conditions. The risk of a larger financial crisis is very low given this isn't a credit event, but a duration event. As long as the Fed doesn't raise rates further we can rule out a financial crisis and so long as you don't believe there is a structural inflationary problem in the economy rates should trend downwards over the coming months.
- analognoise 4y ago
  Isn't a huge part of the inflation simply corporate greed? It's not really supply chain bottlenecks. It's greed. Same thing for "14 year olds can work in meat packing plants". Greed is having a moment and must be countered by policy (top marginal tax rate of 90%, let's go!)
- nostrademons 4y ago
  Except that the narrative around demographics and technology has shifted to support higher inflation. Inflation was kept low through the 2000s despite massive quantitative easing because you had the entry of 3 billion workers into the global economy, keeping wages low even though the money supply was high. That trend has reversed. China hit peak workforce employment in 2015 and their workforce is now shrinking fast, the result of their One Child Only policy in the 70s. The same demographic headwinds affect all major developed economies. Fertility rates fell below replacement rate in most of the developed world in the 1990s - that baby bust is now entering the workforce. Similarly, technological progress has slowed down over the last 40 years. Much of the low-hanging fruit has already been picked; only a select few industries still show significant technological development. In particular, the major need-to-live industries like housing, health care, food, and energy have seen few yield-increasing technological developments over this period, and their price has risen accordingly.
prottog 4y ago
> (why would you lend money for 10 years at 3.5% when you can lend money for 3650 successive 1-day terms at 4.75%?) That's the thing, you can't know that. Rates could go up, down, sideways, or in circles over the next 10 years. A 10-year bond locks it in to a predictable rate and payment schedule.
- nostrademons 4y ago
  You can't, but the narrative presented for why rates will go down is that there will be a financial crisis that forces the Fed to drop rates. How can you simultaneously assume there will not be a financial crisis that wipes out a large number of financial institutions under those premises?

gerad 4y ago

Because there’s no guarantee rates will stay at 4.75% for 10 years. Getting 4.75% for 1 year and then 0% for the next 9 years is objectively far worse than getting 3.5% for 10 years.

akashshah87 4y ago

This is not true. If the bonds are held to maturity, there are no losses.

naveen99 4y ago
Opportunity costs of missing temporarily higher interest rates while bonds are locked up.

rcme 4y ago

The Fed is projecting rate cuts next year. As of March 22nd, the Fed is projecting a federal funds rate of 4.3 in 2024 and 3.1 in 2025, with 2.5 in the “longer run”. Hard to say the Fed won’t cut rates when their own projections have them cutting rates.

mullingitover 4y ago
They were also projecting rates would be low before they suddenly weren't. If the Fed projections were reliable, banks wouldn't be in this situation.
- JumpCrisscross 4y ago
  > Fed projections were reliable, banks wouldn't be in this situation SVB didn't do anything to hedge its duration even well after the "inflation is transitory" period was over.
- rcme 4y ago
  My point was more that the Fed wants to keep rates as low as possible. The person I was responding to was implying the Fed would choose not to lower rates even if they could to avoid “bailing out” the banks.
  - TinyRick 4y ago
    Why does the Fed want to keep rates as low as possible? Their mandates are to provide price stability and maximize employment, not keep rates as low as possible. Unemployment is very low so they are doing well in terms of maximizing employment, but inflation is still running hot, so the logical thing for them to do is keep rates high enough to stave off continued inflationary pressures.
    - rcme 4y ago
      The Fed wants to keep rates as low as possible because their mandate is to keep inflation at 2% and maximize employment. If inflation is at or under 2%, then lowering rates will increase economic activity and increased economic activity will reduce unemployment.
      - nostrademons 4y ago
        The unemployment rate is now 3.6%, about the lowest it's ever been. Where are these workers going to come from? The Fed has been very explicit that they need to tighten labor market conditions. "Tighten labor market conditions" = "cause layoffs". That's how it works, they just can't say it out loud because it'll spook people. They can't bring down inflation until they raise rates high enough that companies start going under, and they have no incentive to lower rates unless actual bad things are happening in the real economy. (Remember also that when rates are high, the Fed has more room to cut when actual bad things do happen, because there's a floor at zero.)

TinyRick 4y ago

Spot on. Listen to the language the Fed uses and this is the clear answer, recently they have been saying things like "we still have a lot of work to do on inflation", "the banking sector is resilient", etc.

kjksf 4y ago
This is the same FED who said "inflation is temporary" and then hiked rates like krazy. I'm not saying this is proof that they won't hike rates, just that what they say should be heavily discounted. They might just pivot on a dime. What I find interesting is that literally everyone is saying that FED is wrong. Like find me anyone outside FED that says: yeah, rising rates is good. Granted, many people who comment (wall street) have self-interest in rates being low but I don't think there's any notable economist who isn't critical of FED.
- TinyRick 4y ago
  FWIW I'm not suggesting that the Fed should or will continue to hike rates. I think they are going to pause rate hikes in the near term and wait for more data to ensure inflation does not become entrenched. The parent comment I replied to said "the Fed is not going to cut rates" which I agree with - but I also don't think they are going to hike rates either.

sdwr 4y ago

> The world doesn't work that way. The world does work that way! Most people don't want bad stuff to happen, and will take action, coordinated or otherwise, to prevent bad stuff from happening. To me, sounds like the Fed is trying to slow this thing down without spooking people. So, promise to cut rates soon, then see what people can actually tolerate, and maybe leave them high enough to chafe a bit.

Y_Y 4y ago

Because rate won’t be 4.75% in 3649 days? If you want a rate guaranteed for 10 years you have to pay for that. Maybe it's not worth it to you today but if the rates drop as expected you might look smart for locking in a good return while the going was good.

nostrademons 4y ago
What's the mechanism for that drop? The Fed doesn't just drop interest rates when everything is going well in the economy. The usual trigger is that some exogenous crisis happens like the Asian financial crisis, the global financial crisis, or COVID-19, and then the Fed drops to stimulate economic activity. Take a financial crisis out of the picture, because everyone who assumes there will be no financial crisis is explicitly taking a financial crisis out of the picture. Why would the Fed drop rates?
- kjksf 4y ago
  For one there's an election in 2024. High interest is killing stock market returns. No administration wants to enter election season with decimated stock market. Hence, if nothing else, there will be political pressure on FED to lower interest rates to juice up stock market. Second, some kind of recession is expected by many so if it happens, that will a reason to cut rates.
  - lesuorac 4y ago
    [Citation Needed] The fed historically does take actions adverse to employment in election years. https://www.advisorperspectives.com/commentaries/2016/08/25/fact-32-of-our-past-60-rate-hikes-were-in-election-years https://www.advisorperspectives.com/commentaries/2016/08/25/...
  - ac29 4y ago
    > High interest is killing stock market returns. The stock market (as measured by SP500) is down only 15% from its all time high, and is currently higher than any point before 2021.
  - 4y ago

kypro 4y ago

It makes more sense when you consider that the market has never believed long-term inflation was a serious issue because frankly the narrative around structurally higher inflation has never made much sense given demographics, technology and debt levels. For the most part where the uncertainty has existed has been in the path of the Fed. For the last several months (since Jackson Hole) markets haven't been sure how quickly inflation would come down and therefore how high the Fed might risk taking rates. But today we have much more certainty. We now know the Fed really can't raise rates much more near-term given the risks and longer-term the stimulus and supply bottlenecks which created the majority of the inflationary pressures will ease. Another thing you need to remember is that inflation easing is actually deflationary because real yields are calculated by nominal yields minus inflation. So as inflation comes down you're actually getting paid more to lock your cash up in bonds which continues to tighten financial conditions. The risk of a larger financial crisis is very low given this isn't a credit event, but a duration event. As long as the Fed doesn't raise rates further we can rule out a financial crisis and so long as you don't believe there is a structural inflationary problem in the economy rates should trend downwards over the coming months.

analognoise 4y ago
Isn't a huge part of the inflation simply corporate greed? It's not really supply chain bottlenecks. It's greed. Same thing for "14 year olds can work in meat packing plants". Greed is having a moment and must be countered by policy (top marginal tax rate of 90%, let's go!)
nostrademons 4y ago
Except that the narrative around demographics and technology has shifted to support higher inflation. Inflation was kept low through the 2000s despite massive quantitative easing because you had the entry of 3 billion workers into the global economy, keeping wages low even though the money supply was high. That trend has reversed. China hit peak workforce employment in 2015 and their workforce is now shrinking fast, the result of their One Child Only policy in the 70s. The same demographic headwinds affect all major developed economies. Fertility rates fell below replacement rate in most of the developed world in the 1990s - that baby bust is now entering the workforce. Similarly, technological progress has slowed down over the last 40 years. Much of the low-hanging fruit has already been picked; only a select few industries still show significant technological development. In particular, the major need-to-live industries like housing, health care, food, and energy have seen few yield-increasing technological developments over this period, and their price has risen accordingly.

prottog 4y ago

> (why would you lend money for 10 years at 3.5% when you can lend money for 3650 successive 1-day terms at 4.75%?) That's the thing, you can't know that. Rates could go up, down, sideways, or in circles over the next 10 years. A 10-year bond locks it in to a predictable rate and payment schedule.

nostrademons 4y ago
You can't, but the narrative presented for why rates will go down is that there will be a financial crisis that forces the Fed to drop rates. How can you simultaneously assume there will not be a financial crisis that wipes out a large number of financial institutions under those premises?