2022-10-26

5-30 Steepener

Lending money to someone for thirty years is a lot riskier than lending to them for one year, or even for five years. The market’s price of risk is an interest rate premium. Lending to me is a lot riskier than lending to HM Treasury, so I pay a higher rate of interest. You would have thought that even with the US Treasury lenders would demand a higher rate to lend for 30 years than for five, but in fact that is not always the case, as the chart shows. When lending long-term, the biggest risk for the lender is inflation, which will kill real returns. With inflation at 10%, a yield of 4.5% means that every year one’s asset is wasting away by 5.5%. In fact, since April 2021 the premium has evaporated to the point that today it’s zero. In recent years, this spread has almost never got lower than -60bp. With inflation getting entrenched, it seems logical that the 30-year rate will start to outpace the 5-year one, but these are odd times, and if the Fed starts buying long-dated Treasuries again, all bets are off.

Note that this a live chart. If you are reading this after Oct 2022, you might see something very different to what I did when I wrote this. However, at least you’ll have quantitative hindsight in that case!

The Economist’s verdict on Sunak: miss

Sunak was behind many of the policies which have landed the UK in the mess that it is in. This is the verdict of the Economist. The UK is in a sorry state, and it’s verdict is that Sunak is not the guy to lead us out of it. I am sure he’s very clever, but all the evidence of recent elections is that academic intelligence can be a handicap in politics, as it alienates the candidate from the mass of voters, especially when it is coupled with a lack of empathy, which may be another of Sunak’s attributes.

It’s also worrying that Sunak has been so keen on stupid ideas, such as freeports, Brexit and ‘Eat Out to Help Out’ as well as supporting Boris Johnson in his challenge to Theresa May in 2017.