Could treasury bonds safe-haven assets be a honeypot in 2022?
Looking at the financial landscape up close, the answer seems obviously not.
The 7-10 Year Treasury Bond ETF is down 5.5% over the year with a current dividend yield of 1.1%. In short, with the core inflation fire burning at 7%, bond investors have been running for cover, selling treasuries to protect against the corrosive effects of inflation on wealth.
As Darren Winters explains, treasury bond safe-haven assets should be a protectorate of wealth. Instead, bond investors are experiencing wealth wither on the grapevine to the tune of 10% at the current 7% core inflation rate.
Treasury bond safe-haven assets are financial black holes at current yields and core inflation rates
So the compelling narrative goes that the sell-off in treasuries is just beginning and that investors should sell every treasury bond rally.
The continuing treasury bonds safe-haven sell-off view has some logic
Bearing in mind bond investors are not going to accept negative real yields. Think about it. Why would bond investors comfortably hold treasury bonds safe-haven assets and experience wealth erosion due to inflation? Bond investors want positive real yields, which means yields go a lot higher, and treasury bond prices keep going down.
You can’t always have what you want
The US Federal Government public deficit nearing 30 trillion US dollars costs nearly 500 billion dollars in interest payment to service. The Fed’s emergency monetary policy, which has been implemented since the 2008 financial crisis, entails a record low Fed fund rate of 0.25% and low treasury yields. Normalizing the Fed fund rate and rising yields would suckle the nation’s lifeblood, with more than half every taxed dollar going towards servicing the interest on the debt.
So, if the Fed fund rate and the 10 Year Treasury Note yields rose to just 3%, that would almost double the cost of servicing the 30 trillion US dollar Public deficit to 900 billion US dollars in interest payments. The Fed’s most valuable cash cow, The US Federal Government is in a debt death spiral. The Fed can not tighten without bankrupting the government.
With bond investors selling treasuries, is there anyone in the room who thinks that the Fed will let yields rise to 3% and raise the Fed fund rates to a similar amount?
In 2018, when the economy was in better shape, the public deficit was far lower, the system broke on a third rate hike 25 basis points to 2.5%.
The final rate hike of 2018 in December sent stocks to their worst month since the Great Depression.
If the Fed tightens Fed fund rates to 3% today, Darren Winters does not think it would be sensational to say that it would trigger the greatest depression in the history of economics.
How can the Fed keep investors sweet on treasury bonds safe-haven assets?
Now take a few steps back from the financial landscape, and the optics show a bigger picture where geopolitics merges with global finance. Geopolitical instability, war, would send capital flows into safe-haven assets, like treasuries. “When all else fails, they take you to war,” Gerald Celente.