Art Cashin clarified the limits of volatility, as his statement about the 3 percent barrier to 10-year bond yields caused yields to decline. I don’t know if the barrier is permanent and an accurate measure, or if breaking it a little bit would not cause chaos. But clearly, owners of stocks and bonds took Cashin seriously, and the 49th tantrum which goes for higher yield was stopped in its tracks.
Well, I exaggerate. It may just be a few efforts at tantrum attacks on bond yields since 2013. But it is so continually attempted that it seems like 49 tries at it! Here is my take with a little help from Liberty Fed analysts, who say that there is something at work regarding long bonds that does not reflect traditional market moves.
Bond Tantrums and Goldman Sachs
So then, what is going on with all these failed bond tantrums and unsettling volatility and upheaval? Well, the simple truth is that there is a fence around this behavior. A little volatility makes money for Goldman Sachs, for example. But Goldman has 40 plus trillion dollars of Derivatives, many requiring low-interest rates. So, when Goldman pines for higher rates, it is not to create risk for those derivatives, so there is a limit. I don’t know what that limit is. But there is a limit. Cashin says 3 percent. But he was just speaking to the stock market. Goldman knows what the interest rate limit is for derivatives. At least we hope they do.
That is what makes Goldman’s efforts to establish volatility so interesting. Clearly, Goldman and the alumni had their hands in the volatility that resulted from a very irresponsible tax cut and spending package. Mnuchin, and Cohn, and even Bannon, all Goldman alumni, were key architects of tax breaks and perhaps even of the reckless spending that resulted because of a compromise between the Republican tax cuts and the Democrat spenders in Congress.
That package of cuts to government revenue caused people who leveraged against volatility to lose massive amounts of money.
Yet Goldman must be confident that while this volatility may hurt stocks, it won’t be a serious problem for bonds. Volatility clearly is not the same as risk for Goldman Sachs. They may have a handle on volatility. But Goldman cannot tolerate bond yields running wild.