Ann: Transurban Investor Presentation, page-14

For investors with a business owner mindset, and who own shares in publicly-listed companies for their long-term shareholder value creation, the word "inexorable", in this context, means at some stage; not necessarily this week, this month, or even this year.

@madamswer (and @Roy2U)

Yes, chances are that at some point nominal interest rates will go up meaningfully; in the same way as chances are that at some point there will be another recession, another mining boom, another global financial crisis, or even another world war.

In the grand scheme of things, these are all highly probable events, on a long enough time scale.
But, whether that point in time is in a month, a year, or a decade, or even further away, I have no idea. As I have said before, I am agnostic as to the direction of nominal yields.

What I do have a degree of conviction about is the direction of long-term real yields; but, before I get into that, I’ll touch upon the (legitimate) topic of bond supply/demand.

This is not the first time that a large buyer of Treasuries has meaningfully scaled back demand, or even become a large net seller; it happened with the tapering of the Fed’s QE programme in 2013-2014, it happened again with the depletion of USD reserves for oil exporting countries after the oil price crash in 2014-2015, and then again when China aggressively reduced their US Treasury bond holdings to defend the Yuan in 2015-2016. In all these instances new demand was found to compensate for the excess supply, and then some more to push yields even further down.

And, talking specifically about China, I would personally take their threats of stopping purchases with a grain of salt: given the size of their holdings, a substantial selloff in US Treasuries is the very last thing they want.

It strikes me that the bond buying in recent weeks is largely an outworking of the Trump uncertainty factor, notably in relation to protectionist posturing.

Maybe, or maybe the trade war was just the excuse. I think the bond buying was largely a consequence of institutional money flowing out of US equities and into Treasuries after the spike in yields, which I suspect was largely driven by fast money (hedge funds and the like) piling in on “long-inflation” bets after the January wage growth data release.

Do you really think that interest rates will be sustained on an ongoing basis at these sorts of record lows?

If what you are talking about is real interest rates, then the short answer is yes; in fact, I think long-term real yields have a distinct probability of going even lower, with any spikes being short-lived.

In a nutshell, the reason why I believe this is that I see the global economy as being in a debt trap, with insolvency and inflation being the only ways out. Being insolvency politically unpalatable, given that, at a global level, the balance of debt lies heavily on public balance sheets, the only practicable way is inflation.

But what inflation means, in this context, is negative real yields. Because, self-evidently, if debt is too large and also compounds positively in real terms, there is no way growth will be enough to compensate for that. Especially when said growth is predicated upon further increasing that debt by way of deficit spending.

Then of course, in the economies where the balance of debt lies more heavily on the private and household sector (such as Australia) higher real interest rates would also undermine consumer demand, and therefore choke economic growth (either directly or via currency appreciation effects).

In synthesis, the possible scenarios I see are the following:

1 - Inflationary scenario) Inflation does start picking up, and nominal interest rates follow suit. For the reasons mentioned above, in order for this process to be successful in the context of a global debt deleveraging, nominal interest rates must lag the rise in inflation, leading to an extended period of negative real yields.

2 - Disinflationary scenario) Despite all monetary and fiscal attempts, deflationary forces still prevail and inflation does not materialise; in this case, all yields (both nominal and real) will likely resume their trend lower, even though real yields would probably remain positive.

Under both scenarios, long-term real yields would find a new equilibrium at a lower level (positive or negative) for an extended period of time.

I do realise that this discussion is going slightly beyond the scope of a TCL thread; therefore, I suggest that if you guys (or anyone else) is interested in continuing this conversation elsewhere they let me know, so I can perhaps start a new related thread under General.

Thanks