10-Year Notes, Coupons, and Yields

The Fed cut its benchmark rate last week, and the stock market spiked up in response. Whether that’s a long-term response or just a sucker’s sandbag is yet to be seen. The effect on interest rates in the private economy in which most of us operate is…inconsistent. And it will continue to be for a long time, regardless of any subsequent Fed moves.

Yields on longer-term US Treasurys have ticked higher since the Fed approved a 0.5 percentage point rate-cut last week. The yield on the benchmark 10-year US Treasury note, which helps set interest rates on everything from mortgages to corporate bonds, settled Friday at around 3.73%, up from 3.64% the day before the Fed’s move.

[R]ates on a lot more debt are driven primarily by swings in Treasury yields. Those are set by where investors think the Fed’s short-term rates will go in the future, rather than where they are now.

“Investors” are speculating with that, and banks IMNSHO contribute to the speculation by setting their rates on short-term costs and incomes rather than taking the longer view (banks aren’t the only ones, and financials aren’t the only industry, where this short-term, or perhaps shortsighted, prevails) of setting their longer-term rates based on the longer-term incomes of the actual coupons those longer-term instruments pay.

The speculation is made possible by the difference between yield and coupon. A 10-year Treasury Note (for instance, the following definitions apply to all debt instruments that are bought and sold) has a market price, a (market) yield, and a coupon. The Note, once sold, has a coupon, which is the amount of interest the Note issuer (here, the Fed) commits to pay the Note holder (who won’t necessarily be the original buyer) each period for the entirety of those 10 years (in our example). That interest rate, that coupon rate will be paid at the appointed time regardless of the market price of that Note at the time the payment comes due.

The Note, once sold, also has a yield that is separate from the coupon, and that yield is created by the Note’s market price, and that price is driven by short-term trader investors’ aggregated speculation of where interest rates will be tomorrow and by long-term investors’ aggregated speculation of where interest rates will be by the end of those 10 years. In either case, if the aggregated speculation is that interest rates will be higher, then the next-issued Note will have a commensurately higher coupon—guaranteed interest payout rate. To make current Notes, issued with those smaller coupons, marketable, those Notes’ market prices must fall, raising their coupon rates relative to their market prices to match that next-issued coupon. The opposite happens if the next-issued Note is expected—from those aggregated speculations—to have a smaller coupon.

That price variation, and the associated yield variation, is good for debt instrument traders and speculators, but it does little for interest rate stability, which is important for those who depend on fixed income instruments, like Notes (and Fed bonds, which have even longer lifetimes), for their income. Those folks include more than just the retired or the stereotypical widows and orphans, and they comprise no small fraction of us Americans.

Scrambling for pennies by trading on yield—by trading on the instrument prices, which move in the opposite direction of yield (and which movement is the core of the speculation and the creator of the associated yields)—granted those pennies accumulate, lend to volatility in a milieu that would benefit greatly from more stability.

Such coupon-based stability might facilitate more than yield-based relative volatility the ability for banks to avoid mis-matching short-term risk with long-term risk mistakes of the sort a bank in California and another in New York made not so long ago that cost them their existence and severely damaged their depositors.

A Misapprehension

This one is, surprisingly, on the part of The Wall Street Journal‘s editors. In an otherwise cogent editorial with several sound points regarding former President and Republican Party Presidential candidate Donald Trump’s offers of specially targeted tax cuts, the editors closed with this mistake:

Mr Trump is now proposing to narrow the base, so [tax] rates will have to be higher.

Not at all. Alternatively, and far more optimally, with a narrower tax base, spending will have to be lower. That’s universal, too. With reduced (tax) revenues for any reason, spending would need to be lower. With current government spending, in fact, even with flat revenues, spending badly wants reduction.

It seems the august editors have lost sight of the cause of our nation’s deficits and debt, the cause extant throughout our history.

Reparations

In the movement to demand reparations for past…mistreatment…of blacks, one group of Americans stands out for its absence from the collection of groups from which reparations for demands are made.

One group of Americans forced our Civil War over its demands to preserve a State’s “right” to keep slaves.

One group of Americans, in the era after our Civil War, enacted gun control laws that kept newly freed blacks and their white supporters disarmed and helpless against the depradations and atrocities inflicted on them by the Ku Klux Klan, an invention of that same group of Americans.

One group of Americans passed Jim Crow laws to deprecate, if not block outright, black Americans’ ability to vote in our elections.

One group of Americans enacted minimum wage laws explicitly to keep blacks from migrating north to compete for jobs on the basis of the wages they were willing to accept.

One group of Americans demanded an end to, and today simply seeks to ignore, our Constitution and its protections for all Americans, including blacks.

One group of Americans practices identity politics with the explicit intent of keeping black Americans separated from the rest of us Americans.

That group of Americans is the Progressive-Democratic Party and its pre-Obama administration ancestor, the Democratic Party.

I wonder why that group of Americans are exempted from demands to pay reparations.

What Happens…

…when government is the definer of a citizen’s, or of citizens’, rights? One outcome is illustrated by this particular enumeration of rights granted by Government:

The Fundamental Rights and Obligations of Citizens

Citizenship
Voting requirements
Freedom of speech, press, assembly
Religious freedom
Freedom of person
Freedom from insult
Inviolability of the home
Privacy of correspondence
Right to petition the state
Right and duty to work
Right to rest
Protection of retirement
Protection of old, ill, disabled
Right to and duty of education
Right to pursue art, science
Equal rights for women
Protection of marriage and family
Protection of Chinese while overseas

That list of Government-created and -granted rights is then followed and superseded by this:

When exercising their freedoms and rights, citizens of the People’s Republic of China shall not undermine the interests of the state, society or collectives, or infringe upon the lawful freedoms and rights of other citizens.

What Government giveth, Government taketh away. In the same breath in this case. As is apparent from that last clause, this is what the constitution of the People’s Republic of China does.

This is the risk we run as we allow to our government increasing authority to define our needs, our purposes—our rights.

On Whose Side…

…is the Biden/Blinken State Department?

Mistakes happen, even egregious ones, even with matters of security. This one, though, should get some folks fired, for cause, and charges brought for the breach [emphasis added].

The independent watchdog for the State Department says the agency deviated from standard policy in the security clearance suspension of Biden Iran envoy Robert Malley, permitted the advisor access to classified meetings, and allowed him to continue work on sensitive issues while he was under investigation.

How does that work, exactly? This is, however it works, sadly typical of the lackadaisical attitude toward national security across a broad range of security milieus held by this Biden-Harris administration and Antony Blinken’s Department of State.

The…screwup…in more detail, from House Foreign Affairs committee Chairman Michael McCaul (R, TX) and Senate Foreign Relations Committee Ranking Member Jim Risch (R, ID) [emphasis added]:

The State Department IG’s report is disturbing and sheds light on the multiple ways the State Department grossly mismanaged Mr Malley’s case and intentionally misled Congress. Mr Malley, a political appointee and close associate of the secretary, was treated very differently than a civil servant or foreign service officer.
Among the new revelations in this report, Mr Malley conducted sensitive government business and was allowed to utilize his official email account after his clearance was suspended. As the report noted, this was done out of fear that Mr Malley might “conduct government business on a personal email account.” This concern was valid because it is one of the primary things Mr Malley did to get his clearance suspended in the first place.

The illogic of that last—that it was necessary to let Malley have the access because without it he might have conducted his business through his personal communications (and which he already was doing, but let’s not talk about that)—is so ludicrous that it had to be deliberately done from malice toward our nation’s security.

Hence my opening question: on whose side are Malley’s supervisor, that supervisor’s supervisor, and the official who restored Malley’s accesses and clearance in mid-investigation? They’re plainly not on the side of the United States of America.

Malley’s supervisor and that supervisor’s supervisor should be fired, those who misled Congress on the matter belong in jail for their perjury in their testimony, and individual who reinstated his clearance in mid-investigation needs to be arrested and put on trial for his espionage-related behavior.

Sadly, no State Department personnel will be harmed in the making of this breach.