As rising U.S. government bond yields stoke stock-market investor jitters, the backup is lending credence to the idea that a decadelong run of extraordinarily low long-term rates was, indeed, all about the quantitative-easing efforts undertaken by the Federal Reserve and other major central banks in the wake of the financial crisis.
That is the conclusion drawn by Deutsche Bank’s chief international economist, Torsten Slok, as highlighted in the chart below:
“Maybe it wasn’t [a] savings glut or secular stagnation or low productivity that were holding down US 10-year rates for the past decade. Maybe it was simply the enormous amounts of QE carried out by the Fed and ECB and other central banks,” Slok said, in a Tuesday note.
He finds a compelling correlation in the chart between the beginning of the Fed’s effort to start running down the size of its balance sheet and even the European Central Bank’s decision to commence scaling back on its bond purchases. Since the Fed began shrinking its asset portfolio in late 2017, the 10-year yield is up 80 basis points, or 0.8 percentage point, Slok said.
The recent and rapid rise in long-dated yields, with the 10-year Treasury note
briefly topping 3.25% for the first time since April 2011 early Tuesday, has somewhat unsettled stock-market investors. The S&P 500
has pulled back from a late-September record and is down 1.2% so far in October, while the Dow Jones Industrial Average
however, is off just 0.1%.
The economist said he would leave it up to the academics to debate whether the impact of quantitative tightening, or QT, is due to a “stock effect,” meaning the reaction is tied to the total size of the central bank’s holdings, or a “flow effect,” meaning its driven by the change in holdings, or the implicit change in forward guidance from central banks as they shift from QE to QT.
“What remains clear is that as long as central banks withdraw liquidity, long rates are likely to move higher,” he said.
It also means that with the Fed, now “master of both short and long rates,” will face much more complicated communication challenges. That, he said, probably explains why policy makers seem to be struggling between an emphasis of their comments around “abstract concepts” such as “r-star,” or the real neutral rate of interest that neither spurs nor slows growth; NAIRU, an acronym for the non-accelerating inflation rate of unemployment, which marks the lowest rate of unemployment that won’t cause inflation to rise; and the optimal size of its balance sheet.