BondsRates and credit
Treasury Yields Hit Eight-Week Lows After Midterms
WSJ reports long-end yields fell to eight-week lows on the Democratic sweep, while Barron's warns gridlock leaves the deficit and inflation risks in place.
Long-end Treasury yields fell to eight-week lows on Thursday as investors digested the midterm results, WSJ reports. The reasoning in the coverage is that a divided Washington limits large new spending, which is a relief for bond markets. We have no yield levels in the feed, so the size of the move is not quantified, and we will not invent it. The sector tape is consistent: real estate, the most rate-sensitive group, rose 3.96%.
Barron's argues the relief is partial. Its pieces from November 4 say the Democratic win does not solve the stock market's bond problem, because gridlock leaves inflation and deficit risks supporting long-term borrowing costs. It adds that a debt ceiling fight now looks likely and that worries about increased federal spending already show up in the market. The mechanism is that divided government can block tax cuts, yet it can also stall deficit reduction.
Data released November 4 points to a slowing but intact economy. ISM Services PMI for October came in at 54.5 against 54.8 expected and 54.9 prior, still well above the 50 line that separates expansion from contraction. The Atlanta Fed's GDPNow for the fourth quarter stands at 3.4, below the 3.7 expected and the prior reading. The September trade deficit of 105 was narrower than the 108 forecast.
The skeptical read is that falling long yields on a political event are a repricing of supply expectations, not evidence of lower inflation. Barron's notes the BOE is expected to hike next, following the Fed and the ECB, because of surging energy costs and inflation tied to the Iran war. Norges Bank held but signaled readiness to tighten. The global direction of policy is still up, and a bond rally against it is a bet on Washington.
The Fed has its own political calendar. Chair Kevin Warsh faces a Senate Banking Committee likely to be run by Elizabeth Warren, a harsh critic, replacing Warsh supporter Tim Scott, per the New York Post. Separately, the Trump-appointed committee hearing on Governor Lisa Cook was rescheduled to December 14. Those are the dated items; the oil path matters too, since a drop below $100 eases the inflation argument behind the hikes.
More from the Bonds desk
Norges Bank Holds, Warns On Tightening
Norway's central bank held its key interest rate on Thursday but kept open the possibility of further tightening if inflation stays elevated, WSJ reports. A hold with a hawkish bias is the central banker's way of saying the next move is more likely up than down, and it conditions on inflation data, not on a calendar date.
The feed does not give the rate level or the inflation figure behind the decision. The context is the energy cost shock from the Iran war, which Barron's cites as pushing other banks toward hikes. An oil exporter holding rather than hiking suggests currency and domestic conditions, not just crude prices, are in play.
Bank Of England Cast As Next To Hike
Barron's argues the Bank of England will be the next central bank to raise rates, following the Fed and the ECB, because energy costs are surging and inflation with them. The headline premise is that the BOE has not hiked since the Iran war started, and that the delay is about to end. The piece is a forecast, not a decision, and no meeting date appears in our data.
Currency traders have already leaned that way. ExchangeRates notes the pound could stay near 11-year highs against the New Zealand dollar if the BoE stays hawkish, while NZ unemployment and election uncertainty weigh on the kiwi. A pound priced for hikes is exposed if the oil decline continues.
Cook Hearing Pushed To December 14
A special committee appointed by President Trump has rescheduled its hearing for Fed Governor Lisa Cook to December 14, a White House official told CNBC. The date is a delay, not a resolution, and it leaves the question of her seat open through the intervening FOMC window. Our data does not give the reason for the postponement.
The calendar interacts with the Senate. A Democratic majority would put Elizabeth Warren in charge of Banking, according to the New York Post, while Warsh is described as having 'no support' there. A central bank facing a hostile oversight committee and a contested governor seat has two governance questions heading into December.
Debt Ceiling Fight Resurfaces
Barron's says the gloves are off for a debt ceiling fight, and that the election's effect on bonds is already visible as worries about increased federal spending. A debt ceiling confrontation matters to the bond market because it threatens the timely payment of securities, and in past episodes it has lifted yields on bills maturing near the deadline.
The headline Treasury move after the midterms was a fall in long yields, which sits uneasily with the fight Barron's describes. Both can hold if traders see the fight as a later problem. The data gives no deadline date for the ceiling, so it cannot be placed on the calendar here.
By the numbers
Also in this edition
Get tomorrow's edition by email. Free, one each morning.