Taps Coogan – July 28th, 2021
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Sean Corrigan, director at Cantillon Consulting, recently spoke with CNBC to call out the idea that inflation isn’t a concern because treasury bond yields are falling.
As Mr. Corrigan duly notes, Janet Yellen and Jerome Powell arguing that falling Treasury yields are signaling falling inflation expectations is the height of circular logic considering that the Fed is now the largest single buyer of Treasury bonds.
Some excerpts from Sean Corrigan:
“Janet yell said…. something about ‘Measures of expectations are what drive prices and they look pretty good.’ Well what measures is she talking about? She’s talking about the bond market as usual, and the bond market as we know, there is a big fat thumb on the scales called the central bank. So, that is a measure that doesn’t measure anything. It measures itself… If you look at all the business surveys, you look at things like the Philly Fed index, you looks at things like the NFIB small business survey in the States, …not only have most of these businesses raised prices dramatically… they’re all planning to raise prices further in the future…”
“The Fed has basically flooded the market with so much liquidity… people have so much money pumped at them by the Fed, is there any surprise that treasury yields are falling in that circumstance?”
“This is a madness driven by institutional measures with nothing to do with the underlying economics”
Thanks to the Treasury spending down its account at the Fed to the tune of about $900 billion so far this year, there has only been $1.08 trillion of net Treasury debt issuance, compared to $3.3 trillion for the same period last year. Of that, the Fed has bought more than half and that’s not counting all the other assets they’ve been buying like mortgage backed securities.
Between the Treasury account at the Fed and the Fed buying treasuries via QE, the two have covered over 90% of deficit spending so far this year. That’s the only thing falling bond yields are saying.
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