SAN FRANCISCO (Reuters) - With yields on U.S. 10-year Treasuries as low as they are, the Federal Reserve needs to be careful about raising U.S. interest rates further, Dallas Federal Reserve President Robert Kaplan said on Tuesday.

The low yields suggest markets expect “sluggish” growth ahead, Kaplan said, and while he is comfortable about where interest rates are now, “I think there’s a point that if the 10-year Treasury rate stays at the level it’s at, we’ve got to be very careful about how we remove accommodation.”

Kaplan, speaking at the Commonwealth Club of California, also said now that the Fed has engineered two rate hikes this year it is time to wait for more evidence that recent weak inflation is indeed transitory, as Fed Chair Janet Yellen has said is likely.</s>Dallas Federal Reserve President Robert Kaplan on Friday repeated his call for immigration reform, continued trade with Mexico and more global integration as ways to counter slow U.S. economic growth.

"I'd love to see our country make the right decisions on how we think about trade," Kaplan said at a meeting of the Park Cities Rotary Club in Dallas, adding that running a trade deficit with Mexico is different from running a trade deficit with some other countries like China because trade with Mexico boosts jobs and competitiveness in the United States.

The U.S. also needs to "come to grips" with immigration reform, he said, because immigrants have historically been big contributors to U.S. labor force growth. (Reporting by Ann Saphir; Editing by Chizu Nomiyama)</s>The Federal Reserve should be cautious about any further interest-rate hikes, Dallas Federal Reserve President Robert Kaplan said on Friday, just two days after he voted with the majority of his colleagues to raise rates for the second time this year.

"We should be very careful about raising rates and we should do it patiently and carefully," Kaplan said at a meeting of the Park Cities Rotary Club in Dallas, adding that he will need to see improvements in inflation, which has weakened in recent months.

Fed Chair Janet Yellen earlier this week expressed confidence that with the U.S. unemployment rate at a 16-year low of 4.3 percent, inflation will rise toward the Fed's 2-percent goal over the medium term. Kaplan's comments suggest that her confidence may not be fully shared by all her colleagues.

Kaplan also repeated his call for immigration reform, continued trade with Mexico and more global integration as ways to counter slow U.S. economic growth.

"I'd love to see our country make the right decisions on how we think about trade," Kaplan said, adding that running a trade deficit with Mexico is different from running a trade deficit with some other countries like China because trade with Mexico boosts jobs and competitiveness in the United States.

The U.S. also needs to "come to grips" with immigration reform, he said, because immigrants have historically been big contributors to U.S. labor force growth.</s>The U.S. Treasury yield curve is flashing warning signs on the economy, pointing to a less optimistic prediction for longer-term economic growth at the same time as Federal Reserve officials are adopting a more aggressive tone on raising interest rates.

A flattening yield curve is often interpreted as a negative economic indicator as it shows concerns about the future pace of growth and inflation, because buyers of long-dated debt would demand higher yields if they expected higher costs.

“The Fed’s optimism has no real counterpart in any of the data that we’ve seen so far,” said Aaron Kohli, an interest rate strategist at BMO Capital Markets in New York “The presumption of weak economic growth is fairly firmly rooted and you can see that in the long-end of the curve.“ Dallas Federal Reserve Bank President Robert Kaplan on Tuesday said that the yield curve showed the market expected sluggish growth ahead; however, New York Fed President William Dudley said this week that the flat yield curve reflects low overseas inflation and borrowing costs and not a weakening U.S. economy.

The yield spread between five-year Treasury notes and 30-year Treasury bonds on Wednesday flattened to 95 basis points, the narrowest since December 2007.

The gap between two-year note and 10-year note yields also declined to 80 basis points, just above 10-year lows of 73 basis points reached in mid-2016.

The yield curve reflects the extra interest investors require to buy bonds of a longer maturity. When they demand higher payments for shorter-dated bonds than for longer-dated ones it shows that they are more concerned about nearer-term risks.

The flattening is not yet near an inversion, which is typically seen as a harbinger of a recession.

The curve flattened this week after Fed officials including Dudley and Boston Fed President Eric Rosengren took a more aggressive view to rate hikes, which sent shorter-dated bond yields higher.

That came despite recent data that shows inflation retreating from Fed targets and weakening retail sales and housing data.

Still, there is not widespread alarm of the risk of a recession. Economists at Deutsche Bank said earlier in June that the chances of a U.S. recession in the next 12 months are remote. Jeffrey Gundlach, chief executive officer at DoubleLine Capital, said the flatter curve would start being a concern “when two– and three-year U.S. Treasuries yield about the same.”

An economic downturn would be a setback for U.S. President Donald Trump who during his campaign had vowed to lift annual GDP growth to 4 per cent, though administration officials now see 3 per cent growth as more realistic. First-quarter economic growth disappointed.

Irrespective of economic predictions, investors say demand for high-quality assets is also helping to flatten the U.S. yield curve, as there are few other options that generate returns.

“The market is starved for product and starved for yield and has to be invested. We are still one of the highest-yielding bond markets on the planet,” said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York.

The flattening yield curve may further loosen financial conditions despite the Fed’s attempts to tighten them, giving an additional boost to risk assets like stocks regardless of the strength of the economy.

That’s because long-dated debt is heavily influenced by pension funds, hedge funds and other participants that lend across the economy, often known as the “shadow banking” industry, and not the U.S. central bank.

“The Fed doesn’t have control over the monetary base because the pile of money represented by shadow banking is so much bigger than what the Fed has under its control,” said Lou Brien, a market strategist at DRW Trading in Chicago.

The Chicago Fed’s National Financial Conditions Index shows that economic conditions have in fact loosened from a year ago even though the Fed has raised rates three times since then.

As the flattening yield curve forces investors to chase higher returns to meet investment objectives, the curve could become even flatter, according to Brian Reynolds, chief market strategist at New Albion Partners in New York.

But history suggests it would be some time before the curve inverts, and even longer before stocks take a turn for the worse, he said.

When the yield gap between two-year and 10-year notes was similar to current levels in 2005 at around 80 basis points, it took 11 months for the yield curve to invert, after which stocks gave an annualized return of 14.8 per cent before the bear market began 21 months later, Reynolds said.

In 1994, the yield curve took an additional three and a half years to invert from current levels and in that instance stocks returned 21.6 per cent on an annualized basis after the inversion before the bull market ended 22 months later, Reynolds said.</s>Many of my recent articles start with some kind of motivation. I'll see something in the news and decide it will make a great Seeking Alpha piece.

Today's article was motivated by Argentina's sale of 100-year bonds denominated in US dollars. For those that don't know, Argentina is a serial defaulter and any investor with sense wouldn't lend them a dime. But we'll get to them later on.

The point of this commentary is to present my belief that bond markets around the world are mispricing risk and do not send useful signals on inflation. This is mainly due to unprecedented Central Bank intervention since 2008 and short investment memories.

I just wrote a piece on the US Bond Market (located here) that shows bonds are the new Certificates of Confiscation. This is a sarcastic way of saying that yields are significantly below the "real" rate of inflation when you look at the large expenditures made by the average person.

Below are a few charts of rent and healthcare that I used in the original piece to make the point. Steadily rising rents and health care premiums are taking a big bite out of your income.

To be fair to the US, I believe the Federal Reserve realizes they've blown several economic bubbles and are trying to rectify that by raising short term rates and allow their balance sheet to rolloff.

Still, yields are very low. As of this writing, the Ten Year US Treasury Bond yields a whopping 27 basis points above the official CPI figure.

ECB intervention has also driven down yields in Europe. Investors buy the bonds and front run their sale back to the ECB.

The result is the Italian 10 Year Bond yields 1.93% as of this writing. That is actually less than the United States!

Well, maybe Italy has really low debt levels that justify this?

Nope. Italian Debt-to-GDP is well over 100%.

This is not a country I would lend to for 10 years at 1.93%.

Finally, let's move on to Argentina, the country that started this article.

To recap, Argentina has defaulted on its debt SEVEN times since the country's independence 200 years ago. The 2001 debt default made international news due to the chaos it caused in the country.

So, when I read that they wanted to sell a 100 Year Bond (not a typo), I was sure no one would buy it. Who would buy a 100 Year Bond from a country that is a serial defaulter?

Well, look at the article I read this morning. The offering was 3-times over-subscribed!!!!

The global bond market has been seriously impaired by years of Central Bank intervention. I don't know how you look at the data above and conclude otherwise. Something is wrong when a serial defaulter like Argentina can sell 100 Year Bonds three times oversubscribed.

Most perplexing is those still using bond yields to make a point about the economy and markets in general. Bond markets are misrepresenting inflation risk (in places like the United States) and basic credit risk (in places like Argentina).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.</s>It has been almost a decade since the stress in the global financial system—that would later turn into the biggest financial crisis since the Great Depression—started to emerge. The recovery has been feeble and policymaking in the developed world is, to a large extent, still anchored to the after-effects of the crisis. Even though the US Federal Reserve has started the process of policy normalization, the consensus view in the market at the moment, as reflected by stock and bond prices, is that the central bank will not be able to move forward at the projected pace.

Last week, the Federal Reserve raised policy rates for the third time in six months, and also outlined its much awaited plan for shrinking its balance sheet, which has ballooned from the level of about $900 billion before the financial crisis to the present level of about $4.5 trillion. It expects to start reducing the size of its balance sheet later this year. Further, official projections showed that the central bank expects to raise rates by another 25 basis points later this year, followed by three more rate hikes next year.

But financial markets remain largely undeterred. This is in sharp contrast to 2013, when just a hint of reducing the quantum of asset purchase by the Federal Reserve led to massive volatility in financial markets across the world. One of the reasons why markets are perhaps not reacting is because they believe that weak prices will not allow the Federal Reserve to tighten policy. Inflation continues to undershoot the central bank’s target of 2%, even though the unemployment rate has slipped to a 16-year low. But the Federal Reserve is of the view that the recent drop in inflation is due to one-off factors such as the fall in prices of cellphone services. This assessment may be correct, but inflation has remained below the central bank’s target despite the economy being on one of the longest expansion streaks in post-World War II history. And all the money pumped into the system through quantitative easing over the years has failed to push inflation as desired.

Meanwhile, a number of economists are reasoning that the Federal Reserve needs to raise its inflation target. Recently, a group of economists, including Nobel laureate Joseph Stiglitz, wrote to the central bank arguing that the inflation target needs to be reassessed. The group, in its letter, noted: “...given the evidence that the equilibrium interest rate had fallen substantially even prior to the financial crisis, and that the Fed’s short-term policy rate remained at zero for seven years without sparking any large acceleration of aggregate demand growth, a reassessment of this target seems warranted.”

Interestingly, it appears that the Federal Reserve is not averse to the idea of reassessing the target. In her reply to a query on the letter, Federal Reserve chairperson Janet Yellen said: “...I would say that this is one of the most important questions facing monetary policy around the world in the future and we very much look forward to seeing research by economists that will help inform our future decisions on this.” It would be interesting to see how the debate progresses, as costs and benefits will have to be examined carefully. Just changing the target may in itself not push inflation and equilibrium interest rate, but it could end up causing major disruptions in both the financial market and the real economy, with global consequences.

In the present situation, if inflation fails to pick up—as financial markets are expecting—the Federal Reserve will find it difficult to move forward both in terms of normalizing policy rates and rightsizing its balance sheet. Monetary tightening is likely to tighten financial conditions and negatively affect economic activity and prices. But if inflation picks up, as labour market tightens and wages rise, financial markets may have to do a fair bit of adjustment.

The policy outlook in the US has undergone a significant change in the last few months. At the beginning of the year, the risk was that if the Donald Trump administration was able to push growth through higher government spending, the Federal Reserve might have to tighten policy at a much faster rate. But it appears that Trump will not be able to pursue such policies in a hurry. So it will now be important to watch whether inflation in the US moves closer to the target on a sustainable basis or not. The answer to this may not only decide how global money managers will adjust their portfolios, but could also influence the future of monetary policy. Both will have repercussions for the global financial system.

Will the Federal Reserve be able to move forward with policy normalization? Tell us at views@livemint.com</s>Dallas Federal Reserve Bank President Robert Kaplan on Tuesday said his "baseline" view continues to be for three U.S. interest-rate hikes this year, including the increase in March.

The pace of hikes could be faster, or slower, he said, if the economy performs better, or worse, than he now expects, Kaplan said at an event at the Bush Institute in Dallas.</s>The issue is: how well and how sustainable?

In the United States, the economy has been strong enough for the Federal Reserve to start raising interest rates, slowly. In the euro zone, growth is robust enough for the European Central Bank to think about dropping public warnings of risks.

China, meanwhile, has so far staved off last year's dire warnings of a sharp, potentially damaging, slowdown.

But much of this comes courtesy of billions of dollars, euros, and other currencies being pumped into the global economy. In some cases, it is still being pumped in.

And the results are not exactly bracing. The International Monetary Fund expects the world economy to grow 3.5 percent this year --- not bad until you remember it averaged 4.2 percent over the 10 years before the financial crisis.

The IMF sees the U.S. economy growing at 2.3 percent this year, below the 2.6 percent average for 1999-2008. Ditto the euro zone -- 2017 growth at 1.7 percent versus 2.1 percent. For China, the numbers are 6.6 percent and 10.1 percent, respectively.

After their spring meeting last month, the IMF and World Bank sounded a bit passionless about it all.

"The global economy is gaining momentum, but risks remain tilted to the downside," they said.

So a near 10-year deluge of global central bank stimulus has not brought things back to where they were and a left a large question about the sustainability of what has been achieved.

As European Central Bank President Mario Draghi said in a slightly different context in the past week: "It is too early to declare success."

Most economists appear to believe the global economy is strong enough to keep going, if not exactly at a tear. The coming week will probably confirm this, but could also provide something of a reality check.

In what may be an example for the global economy as a whole, the United States is expected to report slower industrial output growth for April -- that is, it continues to grow (at 0.3 percent), but at a lesser rate than March's 0.5 percent.

But more attention is likely to be paid to the respective reports of the Federal Reserve banks of Philadelphia and New York -- the Philly Fed and Empire State.

Last time around, they both signalled growth, but with the New York report far less robust than the Philly. Same again?

China's economy, meanwhile, has shrugged off fears of a major slowdown. It is expected to slow from surprisingly strong first quarter growth, however, as previous stimulus measures wear off and policymakers set their eyes on controlling risks in the financial market.

In the coming week, data may further confirm a slight slowing of momentum, but nothing dramatic. Year-on-year retail sales, for example, are expected to dip to 10.6 percent from 10.9 percent.

The euro zone will offer up its second reading of first quarter GDP growth, the first coming in at 0.5 percent quarter on quarter.

Analysts polled by Reuters expect no change, but industrial production data for March did come in far softer than expected.

Another focus will be on the final April figures for inflation. Again, no change expected -- 1.9 percent year-on-year -- but the ECB will be watching to make sure all that money it has pumped in does not take the number too much higher.</s>Australia’s central bank has stuck to its upbeat tune on economic growth, but heightened concerns about financial stability suggest interest rates will remain at record lows even as policy makers abroad turn hawkish.

Minutes of the Reserve Bank of Australia’s (RBA) June meeting showed soaring household debt in the country’s red-hot property market and weak wages growth were at the forefront of policy makers’ minds.

“The board judged that holding the accommodative stance of monetary policy unchangedat this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time,” the minutes showed.

“Members discussed how financial stability considerations bear on monetary policy decisions, reviewing both the academic literature and policy experience in a number of countries, including Sweden and the United States.”

The central bank last cut interest rates in August 2016 to an all-time low of 1.50%. It has since stood pat, balancing the risk of record high household debt against tepid inflation and weak consumer spending.

Australia’s household sector is under severe strain with debt-to-income at a record high 189% while wages are crawling at the slowest pace ever. The share of national income going to households has shrunk to its smallest since 1964 while the savings rate has fallen to a 10-year low.

That is one reason the RBA is unlikely to hike official rates in the coming months as that would push up mortgage costs for already indebted Australian families.

Yet it fears easing further might only stoke further borrowing by investors to speculate in the housing market.

Late on Monday, Moody’s Investors Service cited high household indebtedness when downgrading 12 Australian banks, including the four largest lenders.

House prices in Sydney and Melbourne - two of the country’s hottest markets - have broadly doubled since 2009. There are tentative signs of a cooling off since April following tighter regulations on lending to property investors.

The RBA noted it would take time for the full effects of regulatory measures to show.

Australia’s super easy policy stance contrasts with some other global central banks who are in the mood to nudge interest rates higher. Three of eight policymakers at the Bank of England voted last week to raise rates, while the Bank of Canada surprised by suddenly holding out the prospect of hiking to tamp down their housing market.

The US Federal Reserve has already moved rates higher twice this year as economic growth picked up and the labour market tightened.

RBA Governor Philip Lowe has been doggedly upbeat about the outlook for Australia’s A$1.7 trillion economy, but conceded there were hurdles ahead.

The economy expanded by a disappointing 0.3% in the first quarter of the year, while annual growth was the slowest since 2009 at 1.7%.

However, a stabilisation in mining investment after years of steep falls, better commodity prices, and the country’s biggest-ever home building boom will likely boost future growth.

The labour market is also strengthening with the unemployment rate at a 4-year low of 5.5%. Forward-looking indicators of labour demand have also been positive.</s>NEW YORK, June 21 Americans' love of their smartphones and apps may be contributing to the sluggish pace of inflation that is worrying Wall Street and the Federal Reserve, a top bond manager at BlackRock, the world's biggest asset manager, said on Wednesday.
Robert Kaplan, head of the Federal Reserve Bank of Dallas, says that low bond yields suggest sluggish growth ahead for the economy of the United States.