Fed Gets Opposite Response It Wanted: Inversions Strengthen


Counting the FF Rate, the yield curve flattened quite a bit but inversions between 3-month and long end widened.

In its policy decision today, the Fed was hoping to steepen the long end of the yield curve. The opposite happened as rates at the long end fell.

Note: The Effective Fed Funds rate will not be available until tomorrow. I estimate it to be 2.15 % down from 2.40% yesterday.

Interest Rate Spreads After the FOMC Announcement

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Arrows indicate inversions.

In the following chart, I pay particular attention to the inversion between the 10-year note and the 3-month note.

Interest Rate Spreads Prior to FOMC Announcement

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The spread between the 10-year note and the 3-month bill was a mere -1.3 basis points ahead of the announcement. It is now -7.1 basis points.

So much for the notion a rate cut would steepen the curve.

Yield Curve Following Decision

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Following the decision the Rate Cut Odds Shrank Dramatically.

I don't buy it. This is a recessionary reaction.

Expect more cuts than are priced in.

The bond market does not believe Powell's "Mid-Cycle" Adjustment speech following the announcement and neither do I.

Mike "Mish" Shedlock

Comments (21)
No. 1-8

technical question: if gold is rising in tandem with negative yielding bonds, what happens if bonds start to behave more normally and yields normalise?



The Fed's new mandate is to keep interest rates as low as possible to allow Congress to keep spending money it will never pay back, while keeping rates high enough to attract suckers... I mean patriotic suckers... to keep playing along for awhile.

Everything turned out EXACTLY as planned.

Unfortunately, the money center banks are still zombies, still have no profitable business model, and will not be able to prop up Congressional spending.

Ditto Deutche Bank propping up Germany and the EU...

Ditto Sumitomo propping up Japan...

Pretty much the story all over the G7, we are seeing the same thing. Piles of empty political promises that were never funded and cannot be paid -- ergo they won't be paid.


If the economy can’t run on ± 2.5% interest rates, the problem is not the interest rates. But looking for short-term “juice” is easier than peering into underlying problems in the real economy.


and neither did the stock markets...


The markets were expecting a 0.5 cut, so when they only got 0.25, it was viewed as a 0.25 hike. Forward guidance didn't help either.

  1. World economy slows down which prompts large scale buying of ‘safe’ bonds

  2. demand for bonds is such that yield drop, then turn negative

  3. Negative rate bonds become more common place, so that even junk rated bonds start to have a negative yield

  4. Many of the purchases are by ‘forced’ buyers, such as pension funds, who have a mandate to buy ‘safe’ bonds

  5. BUT, negative yielding bonds means over time, the principal is reduced (or in the case of junk probably lost entirely), so pension funds gradually have less and less money to pay out what was promised.

  6. Either you are forced to raise more from new investors (hiking insurance premiums, more taxation) or you reduce pay-outs for existing pensioners/investors

  7. this is deflationary as it takes money out of circulation

  8. this forces central banks to ease even more in order to create inflation, but lack of good investments takes you back to point 1

Have I got this right? If we are in a vicious cycle of central banks attempting to force inflation vs the behaviour or markets, what is the outcome here? If gold is being priced in tandem with negative yields, what will happen if yields ever revert to ‘normal’? What will it take for yields to go back to normal?

What does a sane investor do in this insane environment?


All signs point to the world being in a big fat capital destruction phase. Disappearing interest rates simply reflect that reality. No one can force them to go up, short of destroying the underlying currency. Interest rates will go up when there is real growth again ... good luck with that being any decade soon. Too many people want to consume existing wealth (usually someone else's) before it can be replaced. So that is exactly what is happening.


Since February, Powell had been draining the Fed balance sheet by $120 billion per month. He casually mentioned that he's going to stop doing that two months earlier than he'd planned. If he now puts that quarter Trillion dollar swing to buying down the short end of the curve, it may end the inversion. It's a significant loosening in any case, but does nothing to deal with the currency race to the bottom now underway.

I think he's afraid to talk publicly about his real problem, that his hopes of getting the Fed's balance sheet back in order before the next financial markets debacle has been dashed on populist political rocks as central banks rush to under-run the dollar.

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