The intraday yield on 30-year U.S. Treasuries touched 5.33%. The last time it reached this level was back in June 2007.
Over the past few weeks, it has been trading between 5.27% and 5.37%—a range not seen since before the financial crisis. There are several forces driving it higher. The federal budget deficit is approaching nearly $2 trillion a year, the total Treasury issuance is nearing $40 trillion, and the Treasury Department keeps flooding the market with new debt. Buyers now require greater compensation to take it.
The same number means different things to different people. An insurance company collects premiums today and only pays out decades later. In the meantime, it must put that money to work—mainly by buying bonds and mortgages. When long-end yields rise, every dollar that rolls back into reinvestment can lock future returns over the next twenty years at a higher level.
With long-end rates moving up, part of the reason is structural. The government’s pace of issuing debt is unlikely to slow in the near term, and overseas investors’ appetite is also changing—tightness is present on both the supply and demand sides. Interest rates aren’t news; they’re a river that slowly changes course.
Prudential and companies like it are positioned right where this dynamic plays out. Their liabilities are written out far into the future, while their assets have to be priced today. The higher the rate, the more valuable that time gap becomes. The entire industry’s ledgers need to be recalculated at this new water level.
Borrowers fear high interest rates, while the people collecting interest hope they don’t drop. Market sentiment is usually represented by the former; the winners on the balance sheet often don’t speak up.
The same pipe—water flows out one end and into the other.
One interest rate, two different kinds of days.
#美债 #life insurance
Over the past few weeks, it has been trading between 5.27% and 5.37%—a range not seen since before the financial crisis. There are several forces driving it higher. The federal budget deficit is approaching nearly $2 trillion a year, the total Treasury issuance is nearing $40 trillion, and the Treasury Department keeps flooding the market with new debt. Buyers now require greater compensation to take it.
The same number means different things to different people. An insurance company collects premiums today and only pays out decades later. In the meantime, it must put that money to work—mainly by buying bonds and mortgages. When long-end yields rise, every dollar that rolls back into reinvestment can lock future returns over the next twenty years at a higher level.
With long-end rates moving up, part of the reason is structural. The government’s pace of issuing debt is unlikely to slow in the near term, and overseas investors’ appetite is also changing—tightness is present on both the supply and demand sides. Interest rates aren’t news; they’re a river that slowly changes course.
Prudential and companies like it are positioned right where this dynamic plays out. Their liabilities are written out far into the future, while their assets have to be priced today. The higher the rate, the more valuable that time gap becomes. The entire industry’s ledgers need to be recalculated at this new water level.
Borrowers fear high interest rates, while the people collecting interest hope they don’t drop. Market sentiment is usually represented by the former; the winners on the balance sheet often don’t speak up.
The same pipe—water flows out one end and into the other.
One interest rate, two different kinds of days.
#美债 #life insurance
