Each June marks a peculiar ritual in Southern California, where the once sunny coast is shrouded in a thick marine layer of gloom. This phenomenon, known as June gloom, is as predictable as the sunrise itself.
Visitors from out of state often mistake this atmospheric condition for smog. However, it is distinctly different. The infamous smog of Los Angeles faded into memory in the early 1990s, thanks to the state’s implementation of mandatory vehicle emissions testing.
While the tests can be seen as a hassle, the payoff is clear: the stunning San Gabriel Mountains can now frequently be seen from Long Beach, and schoolchildren are rarely forced indoors due to poor air quality—unlike in years past.
June gloom arises from a natural interplay between warmer temperatures inland and the cooler ocean waters. Each morning, the heavy marine layer creeps several miles ashore, enveloping the coastal plains until around 1 PM when the sun clears it away, only for it to return the next day.
People react to this phenomenon in different ways; some find it bothersome, while others appreciate the brief three-week respite from the sweltering summer heat. Here at Economic Prism, we find ourselves indifferent, knowing that this fog will soon dissipate.
Treasuries Stumble
As the Pacific Ocean warms up, the marine layer will eventually cease to form, paving the way for beautiful beach weather that will last until Labor Day. However, the financial markets seem to be grappling with their unique form of doom and gloom at present. The stock market teeters precariously between the forces of debt deflation and monetary inflation, leaving many investors on edge.
On one side, a financial system burdened by overwhelming debt; on the other, the persistent push of ultralow interest rates. Eventually, one of these contrasting forces must prevail.
While the stock market oscillates between surges and setbacks, the Treasury market appears to be in a consistent decline. This confuses investors who typically consider Treasuries to be one of the safest investments available.
“Any investor who has been lamenting the boring, sideways movement of the stock market this year is likely focusing solely on U.S. equities,” noted Yahoo Finance. “The real action and volatility are found in the bond and currency markets, where unexpected shifts have shaken their usual reputation for stability.”
Forecasts of Gloom
This year, Treasuries have been anything but stable. For instance, on February 2, the yield on the 10-Year Treasury note stood at 1.67 percent. Just last Wednesday, that yield shot up to 2.36 percent—a significant rise bringing about a notable drop in the price of U.S. government debt.
It seems that Treasury investors are bracing for an anticipated rate hike from the Federal Reserve, prompting them to sell before yields go up and prices drop further. Some may be acting a tad prematurely, yet it is often wiser to exit before experiencing losses on declining assets.
That said, if yields rise too steeply too quickly, a panic could ensue. Investors may rush to sell Treasuries in anticipation of further increases in yields, potentially causing a detrimental cycle of selling. This may already be unfolding on a global scale.
“The global bond market selloff has nullified all gains from this year as significant fluctuations from Germany to the U.S. and Japan have left traders reeling,” reported Bloomberg on Wednesday.
“After peaking at a 2.3 percent increase by mid-April, the Bank of America Merrill Lynch Global Broad Market Index, which includes bonds worth a total of $41 trillion, is now down 0.4 percent for the year.”
“Bond traders have been taken by surprise by indications that the global economy may escape widespread deflation, coupled with positive developments in the eurozone, creating little incentive to hold onto debt securities with yields sometimes dipping below zero.”
Treasury yields are hinting at rising inflation, while gold prices seem to suggest a deflationary trend. The confusion is palpable. As the June gloom lifts in a few weeks, the government bond markets may be poised for turmoil.
Sincerely,
MN Gordon
for Economic Prism
