With The Federal Reserve leaving its target rate at 0.25%, but hinting at a tapering (slowdown) of asset purchases, I thought it would be good to present where The Fed sits at the moment.
You can see the rise in the effective Fed Funds rate from 2016 to early 2020, then KABOOM! COVID struck, the effective Fed Funds rate crashed while The Fed dramatically increased their purchases of Treasuries and Agency MBS. Both Treasury and Agency MBS purchases are projected to decline by mid-2022. The Fed’s target rate (purple line) is project to rise to 1% after 2023.
Where SHOULD The Fed Funds Target rate be? How about 8.80% instead of 0.25%.
So we still have over-stimulypto with The Fed projected to raise rates at a snail’s pace.
Face it, Wall Street wants interest rates low, even if inflation burns out of control.
As we approach another Fed Open Market Committee (FOMC) meeting (November 3rd), it is time to look at the Taylor Rule, created by Stanford economist John Taylor to help everyone understand what The Fed is likely to do. Unfortunately, The Fed doesn’t do what expected.
For example, look at the Taylor Rule using Greg Mankiw’s specification. It says The Fed Funds Target Rate should be 8.52%, not the lowly 0.25% it is today.
That is a big gap between where The Taylor Rule says we should be and where Powell and the FOMC is.
Will The Fed raise their target rate on November 3rd? Or at least start slowing the balance sheet?
Somewhere over the Alps, T-Sec Janet Yellen is fearmongering over a possible US debt default if Republicans don’t kowtow to Democrat’s desires to raise the debt ceiling.
(Washington ComPost) — SOMEWHERE OVER THE ALPS — Treasury Secretary Janet Yellen on Sunday said Democrats should be willing to approve a fix to the nation’s debt ceiling without GOP support if necessary, an approach senior Democrats ruled out during arecent standoff over the issue.
In an interview aboard a government airplane between Rome and Dublin, Yellen castigated Republicans for refusing to help raise the debt limit but acknowledged Democrats may be able to address the issue without GOP support through the Senate budget procedure known as reconciliation.
Senior Democratic leaders were adamant that the debt ceiling be resolved on a bipartisan basis last month. Senate Republicans have uniformly insisted that Democrats should alone be responsible for raising the nation’s debt limit. Congress probably will face a deadline of Dec. 3 to act, though the exact date is uncertain.
Well, Janet, the market (Credit Default Swaps for US) doesn’t seem to be worried about raising the debt ceiling.
Likewise, the CDX 5Y IG for the US investment grade corporate bonds is near historic lows. Even Yellen can’t make that rise.
Only a career academic and politico Bambina like Janet Yellen would try to drum up agita about a US debt default when Democrats can cram down most anything through “budget reconciliation.”
Ethererum, the cryptocurrency, is now at $4,298. It under $200 as the Covid crisis took shape in March 2020. Since Covid, The Federal Reserve went loco and massively increased their money supply and asset purchases. With that response (and economic bottlenecks), inflation has increased to 5.4% YoY.
The Fed’s new moto should be “Policy errors ARE our business!”
No, we don’t look to President Beavis to do much of anything positive about inflation.
With central banks around the world signalling tighter policy amid rising prices, Lagarde said the ECB had done much “soul-searching” over its stance but concluded that inflation was still temporary, so a policy response would be premature.
Soul-searching? The ECB is just doing what Powell and the Fed (aka, Jerome Jett and the Blackhearts) are doing. Keeping the foot on the monetary gas pedal in the face of inflation.
Let’s start Eurozone inflation. It is now sitting a 4.10% YoY. And core inflation is sitting at 2.10% YoY. Inflation is now the highest since 2009 while core inflation is at the highest since 2001.
Like the Federal Reserve, the ECB still has its foot on the monetary accelerator pedal despite booming inflation.
So, Christine, 19 nations in “Europe” having negative 2-year sovereign yields isn’t low enough for you?
The ECB’s platform in Frankfurt reminds me of a bad TV quiz show where participants try to guess prices next year. Call it “The Price Is Wrong.”
Unless, of course, the ECB sees a massive depression ahead.
Federal Reserve Chair Jerome Powell sounded a note of heightened concern over persistently high inflation as he made clear that the central bank will begin tapering its bond purchases shortly but remain patient on raising interest rates.
“The risks are clearly now to longer and more persistent bottlenecks, and thus to higher inflation,” Powell said Friday during a virtual panel discussion hosted by the South African Reserve Bank and moderated by Bloomberg’s Francine Lacqua.
“I would say our policy is well-positioned to manage a range of plausible outcomes,” he said. “I do think it’s time to taper and I don’t think it’s time to raise rates.”
Good luck with that, Jay! You are going to raise the short-end of the yield that will lead to a flattening of the Treasury yield curve. But you are going to continue to buy Treasuries and Agency MBS in order to monetize the rampant spending by Congress and the Biden Administration? C’mon man!
You can see where Powell spoke today. It is when gold tanked along with the 10-year Treasury yield. Both rebounded a bit, but the 10-year Treasury yield continue its fall to 1.6324%.
The US dollar (green) fell when Powell opened his pie-hole. But Bitcoin (blue) fell in advance as if they knew what Powell was going to say.
The Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2021 is 0.5percent on October 19, down from 1.2 percent on October 15. After recent releases from the US Census Bureau and the Federal Reserve Board of Governors, the nowcasts of third-quarter real personal consumption expenditures growth and third-quarter real gross private domestic investment growth decreased from 0.9 percent and 10.6 percent, respectively, to 0.4 percent and 8.4 percent, respectively.
US real GDP nosedived to 0.5% according to the Atlanta Fed GDPNow real-time tracker.
Again, The Fed and Federal government pumped trillions of stimulus into an unprepared economy resulting in massive bottlenecks. So, we are getting declining GDP and rising inflation.
Yesterday’s industrial production dove leading to the 0.5% GDP figure. Today’s housing starts didn’t impact GDP in a meaningful way.
What’s left of it is that the BoJ (and Bank of Japan Governor Haruhiko Kuroda) now holds about half of the huge pile of the central government’s debt. With their target rate at -0.10% and a gargantuan balance sheet, what could go wrong?
But BOJ’s QE has ended. The BoJ’s overall assets stopped growing, and its holdings of government bonds have started to decline.
As of the BoJ’s balance sheet dated September 30, released on Thursday, total assets declined to a still monstrous ¥724 trillion ($6.4 trillion), below where it had been in May 2021.
But look at Japanese home prices with the growth of the BOJ’s balance sheet and general decline in mortgage rates. Like the USA, there was a balance sheet spike associated with Covid and a resulting spike in home prices.
The USA? We also saw a surge in home prices following The Fed’s monetary “stimulypto.”
Bear in my that the US Misery Index is above 10% (U-3 unemployment + inflation).
And if I define the US Misery Index as U-3 unemployment + home price growth, we can see we are at record misery rates. Miserable for households that don’t own a home or are trying to move to a higher housing price area).
It was great to be a “Master of the Universe” (Treasury and MBS trader) since October 1981 when the US 10Y Treasury yield peaked at 15.84% and mortgage rates peaked at 18.63%. Treasury and mortgage rates have generally fallen ever since. But what happens if Treasury and mortgage rates rise?
Bond investors are piling back into short positions, motivated not only by the specter of inflation but also by the risk that yields are approaching levels that will unleash a wave of new selling by convexity hedgers.
That level is around 1.60% in the U.S. 10-year Treasury yield, less than 10 basis points from its current mark, according to Brean Capital’s head of fixed income strategy, Scott Buchta. It’s the mid-point of “a key threshold” between 1.40% to 1.80%, an area “most critical from a convexity hedging point of view.”
Convexity hedging involves shedding U.S. interest-rate risk to protect the value of mortgage-backed securities as yields rise, slowing expected prepayment rates.
It’s already begun to pick up as yields stretched past the 1.40% level. Another wave is expected at around 1.6% — a point of “maximum negative convexity” in agency MBS, “where 25bp rallies and sell-offs should have an equal effect on convexity-related buying and selling,” Buchta says.
Signs that short positions are accumulating include Societe Generale’s “Trend Indicator.” Among its 10 newest trades are short positions in Japanese 10-year debt, German 5-year debt futures, U.K. 10-year gilts, U.K. short sterling and U.S. 2- and 5-year notes. Meanwhile, CFTC positioning data for U.S. Treasury futures show asset managers flipped to net short in 10-year note contracts in the process of dumping the equivalent of $23 million per basis point of cash Treasuries over the past week. Hedge-fund shorts also remain elevated in the long-end of the curve, as measured by net positions in Bond and Ultra Bond futures.
“Bond-bearish impulses remain in place,” says Citigroup Inc. strategist Bill O’Donnell in a note, citing tactical and medium-term set-ups. Traders should be aware of short-covering rallies in the meantime, however, he says.
“Potentially extreme short-term positioning and sentiment set-ups could easily allow for a counter-trend correction under the right conditions,” he said.
U.S. 10-year yields topped at 1.57% this week, the cheapest level since June, spurring the breakeven inflation rate for 10-year TIPS to 2.51%, the highest since May. Friday’s September jobs report could add fuel to this inflationary fire, rewarding bond shorts.
Here is a chart of the rising 10Y Treasury yield against The Fed’s 5Y forward breakeven rate.
Here is a Fannie Mae 3% coupon MBS. Note the rise in Modified Duration with an increase in interest rates.
Well, Janet, we are headed there anyway with GDP crashing to a measly 1.33%.
The fear of not approving a debt ceiling increase (laughable since Democrats can do it on their own) has caused there to be a “little dipper” in the US Treasury actives curve. Meaning that the 1-month T-bill yield is higher than the 1-year T-bill yield.
Confounded Interest - Anthony B. Sanders 
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