(Bloomberg) — Surging Treasuries drove the yield on the 10-year note below 1.2% for the first time since February as coronavirus concerns weighed on the prospects for the global economy and drove investors toward havens.
The yield on the 10-year security dropped as much as 9 basis points to 1.197%.
The resurgence of Covid-19 is stoking a risk-off mood as investors consider whether new lockdown restrictions will sap the economic rebound and reverse an equity rally that had driven stocks to record highs. The decline in Treasury yields may be a signal of cracks in the global recovery, putting the onus back on monetary and fiscal authorities to support ailing economies even asinflation remains elevated.
And global equities are getting clobbered.
As The Fed’s balance sheet hits $8.2 trillion and near zero effective funds rate.
The US Treasury 10Y-3M curve slope is down … again.
Thanks to The Fed’s massive money printing to counter the Covid outbreak we see core inflation at 3%. Ordinarily, this would result in The Fed Board of Governors (BOG) to raise their Fed Funds Target rate and reduce their asset purchases of Treasuries and Agency mortgage-backed securities (MBS).
But The Fed claims that inflation is “transitory” and isn’t raising rates. Rather, The Fed Funds Target Rate remains at 0.25% while The Fed’s Balance Sheet and M2 Money Stock are at historic highs. Notice that following the financial crisis and housing bubble that help create The Great Recession of 2007-2009 The Fed kept is foot on the monetary accelerator, slowed it down briefly under Yellen, then slammed down on the pedal under Powell (as a result of Covid outbreak in March 2020). Despite the economy growing after 2009, The Fed shifted its focus to asset bubble creation. This implies that the economy never really improved under President Obama. Yellen started easing off the pedal when Trump was elected (see portion of the chart where the target rate is rising and the balance sheet is declining). Again, that stopped with Covid in March 2020.
With the economy growing at 6.4% QoQ and U-3 unemployment down to 6.2%, it seems a logical time to cool off the economy. But as comedian John Belushi would say, “But nooooo!”
As an example of mission creep is The Taylor Rule. If we use the Rudebusch Model, The Fed should be raising its target rate to 4.79% compared to the current target rate of 0.25%.
While one may quibble with the estimation of the Taylor Rule, we can all agree that home prices, commodity prices, S&P500 reported earnings, etc. are skyrocketing.
Here is an open letter from Alexander William Salter, Ph.D. of Texas Tech (a George Mason PhD in economics!) talking about The Fed’s mission creep.