Central bank nominees push bond yields even lower
EDITOR'S NOTE
I was taken aback yesterday at the news that Christine Lagarde has been nominated to replace Mario Draghi as the leader of Europe's central bank.
Wait, I thought, she's not an economist.
Turns out, that's not really that important to markets or European policymakers right now (Powell isn't an economist either). Stocks and bonds globally rallied on the news. As Peter Boockvar pointed out, her nomination, and rumors of it, may have been helping bonds rally all week (recall how the German 10-year bund yield has kept sliding to new lows).
Call it a relief rally--relief at the fact that a dreaded Bundesbank member won't be getting the top spot. The stereotype is that Germans are hawkish, reflecting their particular history of hyperinflation, while the French and Italians are more dovish.
While it's hard to categorize the French Lagarde as a hawk or dove per se, it's obvious she is a European who favors the European project and is likely to put that priority above all others. She is widely credited with helping, during her tenure at the IMF, to ameliorate the European debt crisis (when ailing euro zone members like Portugal, Italy, Ireland, Greece, and Spain triggered an existential crisis that sent their bond yields soaring).
The now-departing ECB chief, Mario Draghi, perhaps played the largest role of all. His famous "whatever it takes" promise in July 2012 to keep the euro zone together helped stop the panic and has unleashed unprecedented efforts since (bond-buying, new lending programs, etc.) to avoid any flare-ups.
That's the kind of vision Europe's leaders--and anyone holding euro zone debt at these insanely low and negative yields right now--are looking for. Italy's 10-year yield was over 3.5% just back in October, and has plunged today to just 1.7%.
Meanwhile back here, Judy Shelton and Christopher Waller have just been tapped for the Fed board--the seats the president previously tried to fill with Steve Moore and Herman Cain.
Shelton is a hard-money type who nevertheless favors lower rates right now, and Waller is the chief researcher at the St. Louis Fed--whose president, James Bullard, is one of the most prominent doves right now.
No surprise, given all of these appointments, the U.S. 10-year Treasury yield hit a new recent low this morning below 1.94% (we were sub-1.5% back in 2016). The German 10-year yield hit a fresh record low of -0.399%. The French 10-year hit a record low of -0.1%.
I have to say, it all makes me reflect on what Art Laffer said the other day. "The Fed shouldn't be independent of the administration," he said in a radio interview. "Never should be. None of those people were elected. They were appointed."
The same goes for the European Central Bank. Yes, independence should mean better economic outcomes. But--and this key--how exactly do voters hold central bankers accountable for their actions? How do Europeans voice their displeasure, should it exist, with the ECB? Or simply their displeasure at not having a say in their policy choices, especially when the thorny issue of euro zone integration is involved?
The obvious channel is through electing more nationalist leaders, who might then choose differently for roles like ECB's. I just wonder if today's relief rally on the choice of Christine Lagarde gives way over time to a yet-more-nationalist bent to European politics, especially the next time one or more of their economies goes belly up.
That's it for now--apologies for the length today! But hey, there's no actual show because of the stock market's early 1 p.m. close, so I had plenty of time to spare.
Happy 4th of July and see you Friday!
Kelly
KEY STORIES
IN CASE YOU MISSED IT
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Post a Comment