The main reason the market is moving higher is not because of earnings and revenue growth. Sure, bell-whether tech companies are seeing earnings and revenue growth but their stocks have ran way higher beyond even that growth.

Low interest rates are driving people out of bonds and into stocks. Especially when you have negative interest rates where some investors are losing money by staying in bonds.

The focus is on real yields. What central banks are actually doing is yield curve control is to depress nominal rates and get inflation up. Central banks see the COVID-19 pandemic as a giant disinflationary wave as I correctly labeled back in January on the Saturday show. The best way to fight disinflation is with inflation and so the Federal Reserve is depressing real yields to help big corporations.

The market is pricing in yield curve control and if a central bank doesn’t announce it, they can influence expectations. That want everyone to know they are keeping yields down and that in turn actually does keep yields down. Should they lose control of expectations by investors that interest rates will stay low for a very long time, then the market gets into trouble quickly.

The U.S. Treasury Department said Monday it expects to borrow $2 trillion over the rest of the year as the federal government’s takes on debt to finance the response to the coronavirus pandemic. In a statement, Treasury said its new borrowing estimates for the third and fourth quarters “assume $1 trillion of additional borrowing need in anticipation of additional legislation being passed in response to the COVID-19 outbreak.”

All central banks around the world want to avoid a sell-off in their stock market and bond markets right now because that, in effect, is a tightening of financial conditions and that must be avoided at all costs. No central bank wants to take the risk of their equity or bond markets selling off and so they will continue to buy assets and hold real yields down. Central banks want to create as much inflation as they can right now to counter the disinflation caused by the COVID-19 pandemic.

Geoffrey Yu, senior strategist with Bank of New York Mellon, talks about what the Federal Reserve and central banks think about yield curve control on “Bloomberg Surveillance.”


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