As I write this, we are coming out of a period of several months when 10-year government bond yields in the US, Eurozone, and UK have risen sharply despite central banks trying to cut interest rates.
They most definitely will feed into risky assets. Everything is priced off of government bonds. For equities, for example, long-term government bond yields are the starting point for discount rates for future cash flows. If discount rates rise, stocks are worth less because the net present value of future cash flows declines.
Interesting research review, thank you. However there seem to be an inconsistency between the theory (quote: "As the population ages, the savings rate declines because pensioners save less than working-age people. As savings rates decline, the real rate of interest must rise") and the practical results observed in the US (quote: "The aging population structure in the US reduced trend real bond yields by more than 0.6 percentage points since the 1970s").
Well spotted. that was a poor choice of words from me. What happened is that real yields declined as the baby boomers entered the workforce in the 1970s and 1980s. This is why you see the pink area in the chart of US contributions grow during that time.
Once the baby boomers started to retire in the 2010s, that pink area no longer grew so what used to be a push lower in real yields has stopped and is now slowly reversing into a soft push higher.
Excellent, must-read analysis, thank you very much.
We had almost cracked the code, didn't we?
Clintonism (as I perceived it): fiscal prudence made electable by Sista Soulja-populism + globalism (=cheap imports) --> lower interest rates = higher economic growth = lower deficits = circulus virtuosus.
James Carville was complaining about the dictorship of the bond market when he said that's what he'd want to be re-incarnated as, but I think it was in essence a kneefall.
Now, we might be in a malevolent cycle. Maga (possibly): Voodoo Smoot-Hawley economics made electable by demagogic populism --> higher inflation --> higher interest rates which make the deficit untenable --> bond market loses confidence in US Treasury --> higher interest rates...
Funny thing is, Trump was a buddy of Clinton back in the day.
These dynamics will surely also feed into the risk asset complex too and lead to greater heterogeneity in asset returns. No?
They most definitely will feed into risky assets. Everything is priced off of government bonds. For equities, for example, long-term government bond yields are the starting point for discount rates for future cash flows. If discount rates rise, stocks are worth less because the net present value of future cash flows declines.
Interesting research review, thank you. However there seem to be an inconsistency between the theory (quote: "As the population ages, the savings rate declines because pensioners save less than working-age people. As savings rates decline, the real rate of interest must rise") and the practical results observed in the US (quote: "The aging population structure in the US reduced trend real bond yields by more than 0.6 percentage points since the 1970s").
Well spotted. that was a poor choice of words from me. What happened is that real yields declined as the baby boomers entered the workforce in the 1970s and 1980s. This is why you see the pink area in the chart of US contributions grow during that time.
Once the baby boomers started to retire in the 2010s, that pink area no longer grew so what used to be a push lower in real yields has stopped and is now slowly reversing into a soft push higher.
Excellent, must-read analysis, thank you very much.
We had almost cracked the code, didn't we?
Clintonism (as I perceived it): fiscal prudence made electable by Sista Soulja-populism + globalism (=cheap imports) --> lower interest rates = higher economic growth = lower deficits = circulus virtuosus.
James Carville was complaining about the dictorship of the bond market when he said that's what he'd want to be re-incarnated as, but I think it was in essence a kneefall.
Now, we might be in a malevolent cycle. Maga (possibly): Voodoo Smoot-Hawley economics made electable by demagogic populism --> higher inflation --> higher interest rates which make the deficit untenable --> bond market loses confidence in US Treasury --> higher interest rates...
Funny thing is, Trump was a buddy of Clinton back in the day.