Bond Market Update

The bond market has been taking it on the chin these days and for good reason. (1) The economy is growing faster which tends to increase real (nominal yields less the inflation rate). (2) The tax cuts will have an uncertain effect on the deficit in the short term, but most people believe it will increase the deficit in the longer term. The wildcard is the revenue generated from repatriation of capital. If capital is repatriated quickly, the federal government will collect some tax revenue they would not get without the tax plan. At the same time, the tax plan cuts withholding right away, reducing revenues. (3) The Federal Reserve is now a net seller of bonds, increasing the supply the market must absorb. (4) The bank of Japan has been a net seller of Treasuries the last 6+ months. (5) The price inflation gauges are slowly moving higher.

This article is for paid members - please login or subscribe for access.