Blackrock, Cap on Yields Because of Monumental Bond Demand

This article was first published by me on Talkmarkets:

Business Insider, primarily because of Jonathan Garber, is actively engaged in bond tantrums from time to time. This is my opinion only, but  I think there are statements in Garber's interview with Blackrock's Global Fixed Income Investment Guru, Rick Rieder, that illustrate my view.

 In the long titled article, The Bond Chief at 5 Trillion Investment Behemoth Blackrock Told Us the Most Dangerous Place to Put Your Money, Rieder essentially makes two opposite predictions in the same interview.

At the end of the article, the bond king makes a statement that runs along the traditional belief, that:

In this environment, small moves in yields result in big price adjustments in long-dated fixed income, potentially resulting in significant losses in investors’ portfolios. For this reason, we have a much higher conviction in holding short/intermediate maturity rates over the coming quarters, as the longer end of the curve is likely to back up to levels more reflective of fundamentals. [Emphasis Mine]
This is often what you hear from financial advisers. It is classic stuff. Certainly, as inflation increases, bond yields tend to rise. But, this is not an ordinary interview. It is a dual track interview. It is almost if Rieder is speaking to two different audiences, and is speaking in code. For prior to the standard prediction, he makes an astounding statement, confirming what I have believed all along. Rieder said:

Rates may have a bit more room to run higher, but there’s a ceiling to that based upon the monumental demand for yield. [Emphasis Mine]

Got that? There is a ceiling to a rise in rates because there is a monumental demand for yield. This second quote from the Business Insider article is simply the opposite prediction of the first quote. Garber did not challenge the contradiction.

I have put it otherwise in discussing this issue that so many people do not factor in to investing and into economic theories. I have said many times, from studying somewhat obscure postings that there is a monumental demand for bonds. This is even more monumental than simply a demand for yield! Demand for yield is massive, but bonds are the new gold and demand for bonds is explosive even at low yields and sometimes at negative yields. Blackrock first showed us this demand in an article I shared here at Talkmarkets.

I think the phrase, "monumental demand for yield" is a bit of code for the ideal that bonds themselves are in massive demand as collateral in derivatives markets, besides all the other uses they fulfill.

The interview revealed a few nuggets, like bond yields are slightly up all around the world. The central banks are working hard to keep us off the zero lower bound. That is not a bad thing. Second, the central banks don't like the idea of negative rates as a means of stimulus, that they are falling out of love with the concept. That is also a good thing, if it continues.

But the central banks remain bound by monumental demand, the conundrum, as another tantrum fellow, you heard of him, Alan Greenspan spoke of. Pushing long yields up is difficult because the central banks have simply done too good a job selling bonds. That is their main job, after all. Now everyone wants them.

So, the return to normal is dubious. Tantrums frighten some into selling the bonds, since monetary theory says rates will rise and you need to be in cash and not in bonds when rates are low. But I have argued that theory is dead.

All that is left is for people who know it is dead to go out and scare people into selling their bonds so they can buy them. That is tantrum. And it is kind of sickening. It is a trick.

But if you are having a hard time determining if what I say is true, consider that Janet Yellen sees the need for more bonds. She recently said as posted by Zero Hedge that:

And as Reuters notes, the Fed could get benefits from buying assets other than long-term U.S. debt if in a future downturn it could not buy any more government bonds, Fed Chair Janet Yellen said on Thursday.
She knows bonds are very scarce, almost to the point of not being able to buy them in the next recession!

The Century Foundation has advocated fiscal stimulus coupled with a tax on Wall Street transaction. While the argument is always couched in what it will do for government and main street, truth is, it would help Wall Street get more bonds to be used as gold, and the government would get a huge windfall from Wall Street in return.

I would not advocate fiscal stimulus without advocating a tax on Wall Street transactions, but Helicopter Money probably would be easier to implement. I can just see Wall Street getting the bonds from fiscal stimulus, but not coming through on the transaction tax. Silly me for being so skeptical of our government's power to exact any just policy from Wall Street.

If Wall Street does not want to help America, do their part, just let Wall Street eat cake. It will be a nice cake, but don't give them more bonds until they buckle, America! And watch out for these bond gurus and pay attention to what they really say.


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