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Bond Expert Thursday Wrap: The Risk-Aversion Premium

GNP grew at a 19.1% clip in the first quarter of 1981. The explosion was both the result of a 13% rate of increase in legal reserves in the last half of 1980 and the legalization of payment of interest on NOW accounts & ATS acounts.

The transactions velocity of bank deposits accounted for most of this abnormal growth rate. I.e., customers now had interest bearing checking accounts where the pent-up demand for withdrawls had a one time effect (a time bomb).

As a result, long term AAA corporate bond yields peaked in Sept corresponding to the long term rate-of-change in monetary flows (MVt).

It is mathematically impossible to miss economic forecasts.