Bond Market Manipulation

For the last month, global bond markets have been slowly selling off, meaning that bond yields have been rising, as the reality of rising global inflation began to sink in, despite central banks trying to convince everyone that the inflation is only transitory. Then, on Wednesday, the day before the release of the latest US inflation data, bond markets rallied sharply, reducing yields. Why?

The US 10 Year Bond Yield was over 1.60%, and headed higher. But, part way through Wednesday, it dropped sharply, not just by a few points, but all the way down to 1.50%, and then below. That is, to say the least, odd. What drives real market rates of interest is the demand for and supply of money-capital. In short, that demand consists of businesses demand for money-capital to finance their expansion; the demand of government for money to finance their activities, including investment in infrastructure and so on; and the demand of consumers for money to finance any borrowing to pay bills, buy large items and so on. The supply consists of the realised profits of companies thrown into the money markets, plus any additional savings mobilised from other revenues, or unused money hoards. This indicates the difference between this supply of money-capital, as against merely an increase in liquidity, via the printing of additional money tokens. The latter simply depreciates the money tokens, and so inflates the values on each side of the demand and supply equation, leaving the rate of interest, as the fulcrum, unchanged. As Marx puts it in Theories of Surplus Value, Part 1, Addenda,

“Hume attacks Locke, Massie attacks both Petty and Locke, both of whom still held the view that the level of interest depends on the quantity of money, and that in fact the real object of the loan is money (not capital).” (p 373)

“Massie laid down more categorically than did Hume, that interest is merely a part of profit. Hume is mainly concerned to show that the value of money makes no difference to the rate of interest, since, given the proportion between interest and money-capital—6 per cent for example, that is, £6, rises or falls in value at the same time as the value of the £100 (and. therefore, of one pound sterling) rises or falls, but the proportion 6 is not affected by this.” (p 373)

In other words, as Marx says, printing more money tokens depreciates the tokens, and inflates money prices. So, if £100 of money is demanded by borrowers at an interest rate of 6%, and the owners of money-capital are prepared to supply £100 at that interest rate, so that demand and supply balance, if more money tokens are printed, depreciating them, and causing money prices to rise by say 10%, then the borrowers now need to borrow £110 in order to buy what previously cost £100, whilst the additional liquidity increases the nominal supply of money-capital to £110, whilst the rate of interest that balances these two amounts remains constant at 6%, i.e. both sides of the equation have simply been inflated by 10%.

Ultimately, the yields on bonds have to accede to this determination too, but even in Marx's day, they were subject to significant manipulation by the Bank of England. That is why Marx said that in examining the real rate of interest we should not use the official policy rates, but those applying in the real economy.

“For instance, if we wish to compare the English interest rate with the Indian, we should not take the interest rate of the Bank of England, but rather, e.g., that charged by lenders of small machinery to small producers in domestic industry.”

(Capital III, Chapter 36, p 597)

The policy rates of central banks are often a fiction when it comes to the real economy, but so too are the yields on bonds, especially in more recent times, when they have been simply depressed as a result of central banks policies of QE, to buy them up in huge volumes so as to increase the prices of the bonds, and so reduce the yields. So, what actually moves these bond prices, and so inversely yields, in the short term, is the action of the central bank, which also then encourages speculators to jump on board in the expectation of making capital gains, as the price rises. But, what also would generally affect that would be expected levels of inflation, because if inflation rises, the expectation is that central banks will not loosen monetary policy further, but will, if anything tighten it. If the central bank tightens monetary policy by buying fewer bonds, or selling them, or if it increases its policy rates, so that banks and financial institutions have to pay more for the money they use also to speculate in the purchase of financial assets, then the prices of those assets will fall, and yields will rise.

So, in an environment where global inflation has been continuing to rise, month on month, why suddenly would the demand for bonds rise on Wednesday, causing their price to rise, and bond yields to fall, especially by such a sizeable amount? Well one reason could be that speculators made a big gamble. In the world of financial speculation, there is a strategy based upon “buy on the rumour, sell on the fact.” The principle is that what many think is going to be bad always turns out to be not so bad, and vice versa. For example, if there is likely to be a war, many people imagine the bad effects on the economy that will result. Asset prices sell off, but the professional speculator buys, on the rumour, taking advantage of these low prices. When the war actually starts, its seen that war production boosts the profits of armaments companies and so on, the share price of these companies rises, the speculator makes a large gain, and so sells on the fact of the war, taking this gain with them.

So, the sharp rise in bond prices could have been an example of buy on the rumour, sell on the fact. In other words, as the world worried about rising inflation, the professional speculators bought on the rumour of higher inflation, expecting to sell on the fact when the data came out, suggesting that inflation was not as bad as predicted, and so possibly transitory. As a side point, this shows that what the business channels refer to as investors are nothing of the kind, but merely gamblers. In other words, they do not invest money in the purchase of real capital, i.e. means of production that would increase social wealth, but merely gamble in the short-term over whether the price of this or that asset will rise or fall. They are like gamblers at a roulette wheel betting on red or black, if the ball lands on red, inflation undershoots, they win, if it lands on black, inflation overshoots, they lose. Nearly all activity in financial markets is of this kind of gambling, with a tiny proportion going to actually fund real investment in new productive capacity.

But, if this was the reason that bond prices rose, its hard to understand the extent to which they rose. Even harder to understand is why they then continue to rise after the data was released, and showed that the actual inflation was much higher than had been the estimates for it. Immediately after the data release, bond prices did fall, taking the US 10 Year Yield up to 1.53%, but then the yields started to fall again, coming down to 1.44%. Given the extent to which the inflation data exceeded the estimates, and given all of the other data, this seems wholly irrational. Its true that the June non-farm payrolls data was not as hot as had been predicted, but with 650,000 new jobs created, it was still pretty good, especially as the reason it was not higher seems to be that workers are resisting taking jobs at current wages, in the expectation of being able to get better jobs at higher wages, by being more choosy. And, the weekly unemployment claims data on Thursday also showed the 6th weekly decline, indicating that the US economy is romping away at a rapid pace. It has already recovered the position it was at before concern over the virus began to effect it.

The prices of some raw materials appear to have hit a short term peak, but others continue to rise, including food prices, and energy prices. Another is aluminium, which is used in the production of all sorts of things from cans to motor cars. Everything in the data suggests that inflation is going to continue to rise for months to come, and the liquidity being pumped into the system makes that more likely than ever. Nor is it just in the US. The EU economy has been a laggard in coming out of the lockouts, but it is now emerging, and that will feed into increasing global growth too.

According to the Bundesbank, the German economy is on the brink of a strong upsurge with it likely to recover to pre-pandemic levels as soon as this Summer. Where Germany leads the rest of the EU shortly follows.

Thee seems to be only one rational explanation for the rise in bond prices on Wednesday, and their continued rally after the release of the inflation data, and that is coordinated intervention by central banks to buy bonds, as they try to sell the narrative that inflation is transitory. It is the central bank equivalent of the front running of meme stocks on social media platforms. Of course, such manipulation is not new, as QE demonstrates. What is significant, however, is that the argument given for QE has always been that it was required in order to provide liquidity to economies to encourage economic growth. What can be seen in this manipulation, if anyone still doubted it, is that the true purpose of QE had nothing to do with stimulating the real economy, and everything to do with inflating asset prices.

If the purpose of QE had been to actually stimulate the real economy, then it would not have been accompanied by fiscal austerity, which acted more directly and effectively to reduce aggregate demand, and so economic activity. It would not have been accompanied by measures to encourage further speculation in assets, including the stoking of a house price bubble, once more. Instead, in line with the ideas of MMT, any money printing would have gone directly to finance government spending, which feeds directly into stimulating the economy, whether by employing more teachers, healthcare workers and so on, or by spending on infrastructure, building roads, railways and so on, which stimulates demand for bricks, concrete, steel, timber, and so on, as well as for all of the workers required for that production. Of course, the reason it was not used for that purpose, is the same reason that MMT is a fraud. If the purpose of QE was to stimulate economic activity then this kind of spending would have done it, but precisely in doing it, it would have increased the demand for labour causing wages to rise, and profits to get squeezed, it would have fed liquidity directly into the commodity and labour markets, causing prices to rise, and interest rates to rise. Rising interest rates would have crashed asset prices, in the same way this process did in 2008.

The purpose of QE was not to stimulate economies, but was to inflate asset prices, the form of wealth of the top 0.01%. And, if the current rise in bond prices is the consequence of concerted manipulation by central banks, it also clearly has nothing to do with stimulating the real economy, which is already surging back to and beyond the levels it had reached prior to the pandemic and government imposed lockouts, but is instead, simply the use of public funds to goose the wealth of the top 0.01%, as rising inflation and interest rates again is about to crater the asset price bubbles, and put a flame to the paper wealth of the ruling class.