Bond Yield Watch: Yellen has decided to inflate the debt away. Position accordingly..
“I don’t have a hard-and-fast rule, but I would not like to see it drift above 2%.”
— Janet Yellen on real interest costs, speaking to Bloomberg.
Nothing is more revealing than a bureaucrat unintentionally exposing the true objectives of fiscal and monetary policy in “officialese,” making it difficult for most to grasp the underlying ramifications.
Janet Yellen addressed the ballooning interest payments as a percentage of GDP in her interview with Bloomberg on Friday, referring to the “real net interest cost of debt” as her guiding metric for assessing the sustainability of U.S. debt levels.
There are a couple of interesting takeaways from her focus on keeping the “real net interest cost of debt” below 2%.
First, introducing a “real” element allows this metric to decline if inflation spikes again, as the “real cost” of servicing the debt will be inflated away.
Second, given the current refinancing at higher bond yields than the average coupon on outstanding bonds, there will be political pressure on the Fed to push bond yields back to the 2-3% range (at most).
This almost sounds Japanese to me…
Chart 1: Debt servicing costs are past pain thresholds in the US
Yellen’s comment on real net interest costs suggests that the trajectory is towards negative real rates over the coming years, but there are still good reasons to buy bonds into year-end!
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