Pento – Bonds Signaling Something all right, but not what Pundits Say

Michael Pento, Pento Portfolio Strategies, among other things, said:  “Few commentators in the U.S. are willing to admit that plunging bond yields are signaling the same thing here as in the rest of the world, which is the inability of massive central bank money printing to engender real growth.

These pundits have a myriad of other excuses to explain our low borrowing costs. But my favorite red herring is to attribute the cause of our plunging yields to the low yields in Europe and Japan. They claim that the yield spread alone is causing a monetary deluge into U.S. debt.

It is true that the benchmark U.S. yield has been running more than 1.3 percentage points above the yield on 10-year German bunds since the beginning of July. This premium is the biggest since June 1999, before the euro was introduced. This leaves many to conclude that our yields must fall commensurately with those of Japan and Europe; despite their contention that U.S. growth and inflation rates will be drastically different than these same countries.

But falling yields in the U.S. are not due solely to an arbitrage between Treasuries and European and Japanese debt. To the contrary, it is because the fundamentals of low growth and cyclical deflation are the same in both countries. If the U.S. had differing fundamentals, like rapidly rising inflation, then the yield spread would be rising. That’s because foreign investors would need to be compensated for the increasing differential in real interest rates (much lower in the U.S. than in Europe). Therefore, this condition of falling real rates in the U.S. would cause the Euro to rise vis-a-vis the dollar and erode all incentives to own Treasuries near the same yield as European debt.

The investors who make up the bond market are smarter than most who comment on it. They understand that bond prices are a result of credit, currency and Inflation risks.  Since the credit risks of Europe and the U.S. are fairly commensurate, we have to assume that a worldwide decline in yield reflects the market’s perception of inflation risk, or lack thereof. And now that the U.S. is ending its biggest QE program to date ($1.7 trillion worth of Fed asset purchases), a short-lived respite from the inflation experienced over the last few years is about emerge…”  – Michael Pento on KWN. 

Catch the entire essay at this link. 

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2014/8/24_Deflationary_Depression,_Government_Lies_%26_A_New_Paradigm.html