| When a butterfly flaps its wings in "Location A," according to a well-known phrase, all hell breaks loose in "Location B."
But what happens when a politician flaps his lips in "Location A"? Do bond yields tumble in "Location B"?
Probably, is our guess... especially if "Location A" happens to be a superpower with expansionist, nationalistic ambitions.
At this very moment, there's a politician in "Location A" - let's call that location "Russia" - who is actively flapping his lips about what his country plans to do in countries that do not currently belong to his country. As a result, bond yields in "Location B" - we'll call that location "America" - are falling.
Confused? Don't be. The connection is as obvious as the connection between butterflies and tsunamis.
U.S. Treasurys are still the world's go-to "safe haven" asset. (There may be safer safe havens, of course, like a certain shiny metal that glitters in sunlight, but there is no safe haven that is easier to purchase in massive quantities than U.S. Treasurys). So when the proverbial "stuff" hits the fan... or looks like it might... skittish investors pile into the Treasury market.
Based on the improving economic data in the U.S., Treasury yields should be rising, but they aren't. Instead, Treasury yields are falling (i.e., prices are rising). Why?  Maybe this confusing result has something to do with that politician in Russia who's flapping his lips. Maybe Putin's bellicose posturing is prompting "safe haven" buying of U.S. Treasurys.
To be sure, the Russian president has a lot to say about the countries west of Russia that happen to contain lots of Russian-speaking folks. And most of what he has to say is unsettling to the neighboring countries.
Putin seems to believe that all Russian speakers belong inside the borders of Russia - so much so that he recently referred to the region in and around eastern and southern Ukraine as "Novorossiya" or "New Russia."
"Kharkiv, Luhansk, Donetsk, Odessa were not part of Ukraine in czarist times," Putin publicly explained three weeks ago. "They were transferred in 1920. Why? God knows."
Apparently, Putin distrusts God's judgment on the matter. Putin clearly believes that "New Russia" belongs in the "Old Russia"... or, more precisely, that Russia should expand its borders as much as necessary to include as many Russian-speaking peoples as possible.
We already know where this land grab began; it began in Crimea. But we have no idea where it will end, as our colleague Sean Brodrick pointed out very presciently a month ago ("Who Will the Russian Bear Maul Next?"). Nor do we have any idea when it will end.
But we'd guess that Putin's nationalistic pronouncements and imperialistic land grabs will continue for quite a while... which would mean that Treasurys will become an increasingly coveted "safe haven" asset.
We aren't basing this guess upon an intimate knowledge of geopolitical dynamics, nor upon a profound understanding of the Russian psyche; we are basing this guess on one simple observation: Politicians like to be popular.  Putin is a politician and, thanks to his recent nationalistic pronouncements and his incursions into Ukraine, his domestic approval rating just topped 80% - a four-year high. (Feels good, doesn't it, Vladimir?) That's the only data point a geopolitical analyst really needs to know... and, for now, it may be the only data point a bond investor needs to know.
"You can say many things about Russia's actions in Ukraine. You can call them overly aggressive, illegitimate, and unacceptable," Forbes columnist Mark Adomanis recently observed. "One thing that you cannot say, however, is that Putin's actions are unpopular... As things stand though, the decision makers in the Kremlin (who obsessively keep track of the latest poll numbers) feel as if they are playing a winning hand."
The more that Putin's expansion into New Russia plays well to the home crowd, the more we should expect Putin to attempt ever more brazen expansion efforts... and the more we should expect Treasury prices to rise (and yields to fall).
Our advice to Treasury investors: Monitor Putin's approval ratings.
Cheers,
Eric J. Fry
for Free Market Café |
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