U.S. Yields – Impact

Good Morning Ladies and Gentlemen

«I’m not getting old – I’m evolving»

Keith Richards

Extrapolation of bad news

I do not want to be part of the people sending negative news. By my nature, I usually see the glass half full. However, the media plays an essential role in extrapolating bad news. It seems that short-term negative changes are often turned into negative trends. On the one hand, this is based on the scientifically proven fact that humans are characterised by a psychologically inherent risk and loss aversion. On the other hand, as I repeatedly pointed out in various publications, because of this deep-seated risk and loss aversion, bad news sells better than good news, which the media is ruthlessly exploiting. Nevertheless, the impact of the cost of money can not be neglected.

What about U.S. government bond yields

But first, let us have a look at U.S. government bond yields. This is important because they represent the price, i.e. cost of money. Now, this may be mainly concerning market participants anticipating fewer interest rate cuts next year, and yet I still find it interesting to look at and think about it.

Slightly easing

U.S. government bond yields are somewhat easing again, while they were rising sharply during the summer when trading was weak. After a survey on Wednesday signalled that U.S. business demand for labour cooled in September, yields slipped again, falling to less than 4.1% on 10-year Treasury bonds – they had been more than 4.3% last week. Two-year U.S. paper also fell by 0.2 percentage points within a week. (As a result, the interest rate advantage over the euro area was also falling, boosting the euro against the U.S. currency. From the daily low of around US$1.078 on Tuesday, it went up to more than US$1.092 on Wednesday).

However

As my partner, Hans Schiefen pointed out in his „Seasonal Reflections“, Michael Lewitt from Credit Suisse concluded, „Low rates lowered I.Q.s along with the value of the financial instruments they debauched, leading people to buy worthless SPACS and cryptocurrencies, grossly overvalued IPOs, even more grossly overvalued stocks after they went public, and egregiously overvalued credit instruments of all kinds. Now, the cost of money is being reset by central banks because they lost control of the inflation narrative (particularly financial asset inflation – long ago). Investors have yet to adjust to the cost of money, which is not going back to zero (or below zero) absent another financial crisis (which, if you look at government finances, is a real possibility, but that is a topic for another day). For now, rates will remain well above zero, which means all the assumptions that led public and private actors to borrow trillions of dollars will be tested (and borrowers will flunk those tests).“

The cost of money

Ladies and Gentlemen, as Michael has so aptly formulated, the significant impact the cost of money may have on various financial instruments (and he pointed out some of them) should never be underestimated.

Closing remark

Although I am a genuinely positive person, I am always concerned by the cost of capital or money, as Michael named it. I am considering it when investing for our private clients, and today I have the impression that, at least in some financial instruments, some of the effects are already priced in. Yet, if interest rates continue to go up for a few more quarters, market participants may not be impressed.

Your point of view

Ladies and Gentlemen, please share your opinion with me, but please remember (instead of hitting the reply button) to send your messages to: smk@incrementum.li.

Many thanks, indeed!

I wish you an excellent start to the day and a wonderful weekend!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
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9494 Schaan/Liechtenstein
Mail: smk@incrementum.li