Will the result be a Fed Cap Bond?

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Market thinking on interest rates has been relatively late, and they tossed in a bit last week when Federal Reserve Chairman Jerome Powell tried to be just with them. But could the markets be right?

That twist refers to the yield curve, especially the ever-increasing tilt, driven by the large increase in flat rates in the long run. That has raised the 10-year Treasury yield above 1.50%, from around 0.92% at the start of the year. Beyond the point, bond yields are back to where they were in early 2020, before the pandemic hit.

As a result of the rise in output, Powell, in an interview with the Wall Street Journal Jobs Summit on Thursday, was expected to reveal that the Fed intends to do something to put them down. It is not clear why this was expected, but he had only to reiterate the central bank ‘s policy stance – although he pretended that the recent outcome had caught attention.

With wage earnings still 10 million below the prepandemic level, Powell stressed that the labor market is far from the Fed’s goal. And while there could be a rise in inflation in the coming months – at least compared to the depressing readings in March and April last year – he stressed that any temporary rise is expected . He therefore reiterated the Fed’s intention to maintain its short-term rate target close to 0% and the monthly purchases of securities backed by Finance and institutions mortgages at $ 120 billion. These ultra-easy policies, he said, will not end until maximum earnings are reached and inflation consistently exceeds 2%.

Regarding the rise in bond yields, Powell stressed that the central bank is looking at a wide range of financial indicators. It is only constant tensions or erratic movements in financial conditions that can cause concern. By implication, he was saying that the backlash in bond yields and the recycling in the

Nasdaq

they are not anxious enough. Of course, corporate credit markets remain strong, with a growing new magazine size, while equity positions are becoming gloomy, especially with the explosion of special purpose construction companies, or SPACs.

Investors hoped that Powell would outline a plan to slow the rise in yield, which has slowed down the richest growth stocks at a price. When it did not, the disappointment was particularly enthusiastic among those who came in towards the most speculative and hottest trading funds, which show a loss.

They may have expected the Fed to follow the example of the Reserve Bank of Australia, which has strongly resisted yields by defending a 0.10% cap on three-year government bond yields with aggressive buying . The Aussie central bank has confirmed that it intends to keep the currency easy until inflation and labor market targets are met, which is not expected until 2024. That strategy sounds almost as if it would be cut and taken out of the Fed’s playbook.

Going back to history, there is a precedent for the Fed to get a peg result. During World War II he maintained long-term Finance levels at 2.5% to help fund the war effort. Currently, with a higher budget deficit than would have been further exacerbated by the $ 1.9 trillion fiscal stimulus package pushed by Biden administration, more than a few market participants suspect that the central bank may fail. aiming to help eliminate federal government borrowing costs through what is becoming a crude form of modern money theory.

That was suggested by Mark Grant, chief strategist at B. Riley FBR. Mar a

BofA Securities

a strategy team, led by Michael Hartnett, writes in a research note that a 1% increase in Treasury yield would increase Uncle Sam’s annual interest cost by the equivalent of NASA’s double budget. Interest costs 1% above the Congressional Budget Office’s baseline estimate of $ 9.7 trillion – more than 10 times the U.S. annual defense budget – would add to the deficit from 2021 to 2030. These capabilities are worrying, the strategies conclusion, making sort of output loop control inevitable. .

The Fed has been involved in “Operation Twist” once or twice. The first, back in 1961, when the anonymous dance floor was at its height, had little effect on band yields. The example was more contemporary from September 2011 to December 2012. During that expansion, a DataTrek research note says, 10-year Treasury yields fell to a low of 1.44% in July 2012, from a previous high of 3.75%, although that was a number of factors at play, including the European debt crisis.

The question now: Will the Fed peg have an intermediate and long-term Fed yield, as does the level of federal funding overnight?

Deutsche Bank

Alan Ruskin’s strategic macro dismisses a series of reasons why Powell & Co. stopped. from doing so. As with cash-strapped intervention, he warns, pegging is easier to start than to stop. In fact, BnA’s Hartnett likens Fed gives flexible control to the failed European Exchange Rate Criteria in the 1980s and early 1990s, which famously gave George $ $ billion. Soros after he promised that the British pound would not stay in the ERM.

Nonetheless, yield curve control may be a topic of discussion at the next meeting of the Federal Open Market Committee, which ends on St. Patrick’s Day, March 17. There is nothing to prevent the Fed from shifting its monthly bond to longer maturities, but cash authorities are unlikely to work immediately. Ruskin suggests there would be a jump in the Treasury 10-year, to a possible 2% – which “significantly outweighs other risky assets” – which could get some response. But with the

S&P 500

index less than 5% lower than the maximum, we do not yet exist.

Write to Randall W. Forsyth at [email protected]