This is not the catalyst you're looking for. Move along.
The bond market took the world by storm this week. The market was already uneasy leading up to the testimony from the FED, but attempted a strong rebound after that. Then everyone realized that the 10 year had breached the 1.5% yield marker overnight. IS THIS THE END????
The poverty-ridden permabears will be disappointed that it is not. Thought they crank out scary-looking charts promising that this time it's different, but it is not. We have really two scenarios.
How's it play out
Well, the market will have to start behaving normally relative to the economy at some point. As the economy improves the market will have to correct and grow calmer. The key takeaway from this week is that bond yields are accelerating and will continue to accelerate to try and catch up to the expected inflation rate. The 10 year is still at a real rate of -0.70 while the 30 year is the only one with a yield in the black which is attained at the beginning of February. But it's inevitable that left on their own the rates perhaps won't accelerate but will continue to rise.
The actual FED Put
'We will keep our bond purchases at least at their current levels for the foreseeable future.' The FED is not currently buying mid-term bonds but certainly left the door open for it. To exercise yield curve controls the FED will begin buying and hoarding shorter and shorter-term bonds if they are out of pace with the unemployment metrics. The FED is an employment-at-all-costs entity for the next few years and in the week's comments emphasized that they will not settle for less than what they had in January of 2020.
The market will continue to rotate more and mix it up more and more going forward.
The poverty-ridden permabears will be disappointed that it is not. Thought they crank out scary-looking charts promising that this time it's different, but it is not. We have really two scenarios.
- Scenario 1: A repeat of the January 27 correction. This is likely in my opinion. The similarities are strong with both sell offs being triggered by: concerns about bond yields, coming on the heels of statements from the FED, tested the 50 day ema before being interrupted by the weekend.
- Scenario 2: Another interest rate scare like Oct - December 2018. This is unlikely because the economy is in a fundamentally different phase. And that's what this thesis runs on; that the economy is influencing the market in this case - not the market influencing itself. At the time the market was spooked by flattening yield curves and Fed Rate increases pbs.org/newshour/economy/making-sense/6-factors-that-fueled-the-stock-market-dive-in-2018 This time it is precisely the opposite: the Fed isn't raising rates so the bond market is selling off.
How's it play out
Well, the market will have to start behaving normally relative to the economy at some point. As the economy improves the market will have to correct and grow calmer. The key takeaway from this week is that bond yields are accelerating and will continue to accelerate to try and catch up to the expected inflation rate. The 10 year is still at a real rate of -0.70 while the 30 year is the only one with a yield in the black which is attained at the beginning of February. But it's inevitable that left on their own the rates perhaps won't accelerate but will continue to rise.
The actual FED Put
'We will keep our bond purchases at least at their current levels for the foreseeable future.' The FED is not currently buying mid-term bonds but certainly left the door open for it. To exercise yield curve controls the FED will begin buying and hoarding shorter and shorter-term bonds if they are out of pace with the unemployment metrics. The FED is an employment-at-all-costs entity for the next few years and in the week's comments emphasized that they will not settle for less than what they had in January of 2020.
The market will continue to rotate more and mix it up more and more going forward.
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