maandag 14 november 2016

The Feedback Loop in U.S. Bond Yields

Imagine what is happening now.

U.S. bond yields are going up.

Japanese and European bonds are overvalued against the U.S. bonds because of their lower rates. So everyone is selling them. But Japan has kept their bonds at 0% yield artificially.

Which means Japan Central Bank needs to print a lot of money to buy up those bonds to keep rates low. And that will debase the Japanese yen. Which is happening right now.

Japanese yen is debasing, so that means China will need to debase yuan too otherwise it will be not competitive enough in Asia currency basket.

Yuan going down is correlated with more selling of U.S. treasuries which will blow up U.S. bond yields into the stratosphere and there you have your feedback loop.

And finally, a higher U.S. bond yield means velocity of money picking up and that leads to inflation.

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