Graph of the week

Graph of the week

17-11-2017 | インサイト

Powell and the end of the bond market rally

  • Lukas Daalder
    Lukas
    Daalder
    Chief Investment Officer

https://www.cnbc.com/2017/10/26/height-matters-the-connection-between-tall-fed-chiefs-and-interest-rates.html

A new Federal Reserve chair: what do they have in store for us? According to the graph, the bond markets should watch out.

I think the disclaimer under this week's graph says it all. We don’t actually believe that interest rates are determined by the height of the Fed chair, but it has been an interesting coincidence. No one actually believes there is a link between the height of the Fed chair and interest rates. And neither do I. This week's graph should be filed away under the subject ‘humorous’ and not taken too seriously.

Even funny graphs can be worth a more critical look, though. When I look more closely at this one, a few things do stand out. First, as it turns out, confirming the exact height of the various Fed chairs is not all that easy. According to one source, Janet Yellen is 1 meter 60 cm tall, but other sources say ‘5 feet’, which is actually only 1 meter 52 cm. Not that it matters, particularly if you are researching a connection − which clearly doesn't exist − between the height of the Fed chair and interest rates, but I want it on the record anyway, just in case.

More importantly, whoever created this graph did a shoddy job of it. While the little caricatures are pretty cute, that's about the only good thing I can say about it. The fact that the line grazes Volcker's head but barely reaches Yellen's knee makes it impossible to say anything meaningful about the new chair. Will interest rates under the new chair be at knee (4%), belly (6%) or head level (10%)? It's not clear. Which is a shame, because if you look at the next graph, the connection seems much stronger.

最新の「インサイト」を読む
最新の「インサイト」を読む
配信登録

While I'll admit that all the colors and caricatures in the previous graph are more fun to look at, the link illustrated by this one is considerably more robust. For each chair, the average bond yields during the course of their term is plotted on the x-axis, and on the y-axis, their (alleged) height. Assuming that Powell stands at around 1 meter 75 cm, leads to the rock-solid prediction that bond yields will be 5.5%. But remember, this figure is supposed to be an average for the entire term, and as such would be a huge move from the current 2.3%.

Is it possible?

Let's give Powell the benefit of the doubt and assume that he, unlike Yellen, will stay chair for the entire eight-year term. Is it feasible that bond yields could average 5.5% over that time? While it certainly isn't likely, you could of course come up with a scenario in which it is possible. Let's say Congress passes Trump's tax reform plans (which would raise the gross national debt) and the Federal Reserve also starts shrinking its balance sheet (thereby creating more debt that has to be absorbed by other parties). Suppose the US sees a sharp rise in wages during the same period and you're off to a pretty good start. If we also assume that the Fed is taken unawares and maintains too accommodative a monetary policy for too long, it could result in a huge shock for the bond market. Such circumstances could unleash a classic wage-price spiral, where a fear of future inflation could trigger a considerable increase in bond spreads.

While none of this sounds very likely, I have checked to see when was the last time that bond yields averaged 5.5% over a period of eight years. In the Netherlands, you have to go back to 1995-2003, but in a country such as Australia, it was more recent: 2003-2011. And incidentally, in the US, the last time it occurred was between 1996 and 2004. In other words, I've seen it happen before in all of these places.

It should be noted, however that this isn't the first time predictions have been made about the financial markets based on the height of the Fed chair. The graph below came out when Yellen took office in 2014. The heights are plotted on the y-axis, and on the x-axis average S&P 500 annual returns... I can't think of a better way than this to show just how ridiculous these graphs actually are: Since Yellen took office, US stocks have had an average annual return of 10%. You can also invert it: for the prediction to be true, the value of the US stock market would have to drop 40% over the next three months.

I, for one, am not worried about it.

重要事項

当資料は情報提供を目的として、Robeco Institutional Asset Management B.V.が作成した英文資料、もしくはその英文資料をロベコ・ジャパン株式会社が翻訳したものです。資料中の個別の金融商品の売買の勧誘や推奨等を目的とするものではありません。記載された情報は十分信頼できるものであると考えておりますが、その正確性、完全性を保証するものではありません。意見や見通しはあくまで作成日における弊社の判断に基づくものであり、今後予告なしに変更されることがあります。運用状況、市場動向、意見等は、過去の一時点あるいは過去の一定期間についてのものであり、過去の実績は将来の運用成果を保証または示唆するものではありません。また、記載された投資方針・戦略等は全ての投資家の皆様に適合するとは限りません。当資料は法律、税務、会計面での助言の提供を意図するものではありません。

ご契約に際しては、必要に応じ専門家にご相談の上、最終的なご判断はお客様ご自身でなさるようお願い致します。

運用を行う資産の評価額は、組入有価証券等の価格、金融市場の相場や金利等の変動、及び組入有価証券の発行体の財務状況による信用力等の影響を受けて変動します。また、外貨建資産に投資する場合は為替変動の影響も受けます。運用によって生じた損益は、全て投資家の皆様に帰属します。したがって投資元本や一定の運用成果が保証されているものではなく、投資元本を上回る損失を被ることがあります。弊社が行う金融商品取引業に係る手数料または報酬は、締結される契約の種類や契約資産額により異なるため、当資料において記載せず別途ご提示させて頂く場合があります。具体的な手数料または報酬の金額・計算方法につきましては弊社担当者へお問合せください。

当資料及び記載されている情報、商品に関する権利は弊社に帰属します。したがって、弊社の書面による同意なくしてその全部もしくは一部を複製またはその他の方法で配布することはご遠慮ください。

商号等: ロベコ・ジャパン株式会社  金融商品取引業者 関東財務局長(金商)第2780号

加入協会: 一般社団法人 日本投資顧問業協会

本記事に関連するテーマ: