Daily Commentary

MarketMinder’s View: First, please keep in mind that we favor no politician nor any party or movement, assessing developments solely for their potential economic and market effects. In this case, Alberta’s referendum on whether to hold an official independence referendum should lower uncertainty modestly. In Monday’s provincial vote, heavy turnout estimated at 80 - 85% of registered voters flatly rejected the tenth question, which asked voters if the province should start the legal process to hold a vote on leaving Canada. The “remain in Canada” side won decisively, taking 76.5% of the vote. As this article notes, an independence movement could have stirred thorny questions for businesses and investors, including the potential regulatory environment, taxes, currency and monetary issues and more. So this vote, whatever you think of it, removes a sentiment overhang to a degree. For more, see Todd Bliman’s August 6 column, “The Tenth Question Facing Alberta.”

MarketMinder’s View: Two things predictably follow rising long-term bond yields. One is that fear over the climb will almost inevitably jump, with headlines claiming everything from fiscal fears to inflation or politics are behind them. The other is that demand for bonds tends to improve. Japan is no exception to this, as yields have jumped across the entire sovereign yield curve—part of rates’ return toward normal as the Bank of Japan undoes decades of bizarre monetary experimentation. Lo and behold, the feared bond market calamity hasn’t followed. Instead, “Japan’s 20-year government bond auction Tuesday saw the strongest demand on record, a signal that elevated yields are starting to lure domestic investors back into the market. The bid-to-cover ratio was 5.84, compared with 4.01 at the previous sale, and a 12-month average of 3.73. In reaction, the yield for the tenor fell as much as 6 basis points to 3.710% after the results, while the 30-year yield dropped as much as 5 basis points.” A bid-to-cover ratio of 5.84 means there were nearly six bids for every bond sold. And the article notes it isn’t a one-off. “Japanese investors’ net purchases of domestic government bonds climbed to the highest in 17 years in the six months ended Sept. 30, according to data released by the Japan Securities Dealers Association on Tuesday that was compiled by Bloomberg.” Amazing what a return to more normal rates can do!

MarketMinder’s View: This is a newsletter, but our interest is in the lead blurb that pairs with the title. The argument, in short, is that rate hikes can tighten liquidity enough to pop what it presumes is an AI bubble, citing evidence from the 2000s’ dot-com bust. Above and beyond whether you see AI as a bubble, there is a hole in the analysis here that we think is a fatal flaw: It looks at rate hikes in isolation. Rate hikes alone are neither automatically bearish nor do they always mean tighter monetary policy. Whether policy is tight depends on credit availability, which hinges more on the shape of the yield curve than where short rates are. Here is why: Banks borrow short term to fund long-term loans. So when long rates top short, lending is profitable and credit is usually available. When short rates top long, loan profits get dinged. Credit usually tightens, sometimes freezing. So in the example used here, consider the dot-com bubble again. The Fed tightened rates starting in June 1999, raising them from 4.75% to 6.50% in June 2000. 10-Year Treasury yields initially rose from June 1999’s 5.8% to a high of 6.7% in January. (Data from FactSet.) The yield curve was still positively sloped. Then the curve inverted. And that inversion persisted all throughout the rest of the year, a warning of recession ahead. Today? 10-year Treasury yields have climbed more than the 0.25 percentage point hike thus far. The yield curve is positive. That is the metric to watch, not short rates in isolation.