How Long Before the Fed Tries to Manipulate Long-Term Rates Lower?

Mish

The Fed pledged to hold interest rates low for a very long time. What about the long end of the curve?

Yields Reveal a Mini-Revolt On the Long End

  • 3-Month Yield: 0.04%
  • 1-Year Yield: 0.06%
  • 2-Year Yield: 0.11%
  • 3-Year Yield: 0.20%
  • 5-Year Yield: 0.50%
  • 10-Year Yield: 1.20%
  • 30-year Yield: 2.01%

Yield Curve Dramatically Steepens

Yield Spreads 2-10 and 2-30 201-02-14A

Notes

  1. In July of 2018 the spread between the spreads was only 12 basis points with the 2-30 spread at 38 basis points and the 2-10 spread at 26 basis points.
  2. The 2-30 spread at 1.83 is higher than any time since February 10, 2017.
  3. The 2-10 spread at 1.07 is higher than any time since April 7, 2017.

Fed Losing Control of Long End

  1. On February 8, the Fed noted Monetary Policy Will Stay Accommodative For a Very Long Time. I commented "Like Forever".
  2. On February 10, in a speech on the labor market Powell said the True Unemployment Rate is Actually 10%

In Powell's speech, he reiterated the message rates would stay low.

But spreads have widened dramatically which begs the question: 

How long before the Fed openly intervenes to push rates lower on the long end of the curve?

Mish

Comments (35)
No. 1-18
Lance Manly
Lance Manly

As soon as they can. The Fed speakers have been consistent on the policy. We may not like it but it is what it is.

Augustthegreat
Augustthegreat

A rising spread-curve mans the market is predicting a better economic conditions in the future. Why would Fed try to suppress it? Debts do not matter as the US never has the intention to pay them back.

ccichocki
ccichocki

Sounds like a good time to short financials.

Scooot
Scooot

The curve from 5 years out looks odd to me. You can pick up 70bp extending 5 years from 5 to to years, but you only pick up 81bp extending 20 years from 10 years to 30 years? Either the 30 year is expensive or the 10 year is cheap, or a bit of both.

JoeJohnson
JoeJohnson

Someone who's more knowledgeable explain it better. But why does it really matter? Can the Treasury just perpetually issue short term debt instead and roll it over? I mean it has an unlimited buyer, the Fed.

Sechel
Sechel

I never understood the idea that the Fed has no control over long term rates. The 30 year rate is built on the term structure of rates and reflects an expectation of future short term rates. If the market believes the Fed will keep short term rates low for an extended period that has an impact. The Fed isn't just any player either

Sechel
Sechel

Manipulate is such a loaded word. Every action or advisory could probably be described as manipulation

Roger_Ramjet
Roger_Ramjet

I would bet shortly after the $2 trillion stimi bill is passed, the Fed will have to deal with the long end of the curve.

caradoc-again
caradoc-again

What impact on high yield (HYG) now sub 5%?
Where is it heading, why and when if current situation persists, long end yield rises further or long end pushed down?

Six000mileyear
Six000mileyear

Ever since the late 1700's , there have been three 60+/-1 year interest rate cycles, with and without the FED. That alone says the FED is not in charge. The fourth interest rate cycle is 40 years along and has most likely formed a double bottom. The next 20 years will be part of an exponential trajectory for interest rates. Yields are so low, and budgets so tight there is little wiggle room to tolerate a doubling of interest rates. Most debtors will default. Those trying to sell anything to repay their debts will force market prices lower. The decrease in market value of the asset pledged as collateral will force bond prices even lower / interest rates UP. The tight rope act by today's financial institutions will either blow up or fully expose the financial institutions as corrupt and fraudulent.

Realist
Realist

It is difficult to predict the future. Interest rates went down far lower, for far longer than I would have ever anticipated. I did not expect to ever see negative yields, yet 27% of the global bond market has negative yields today. I would like to say that nothing could surprise me in the future, but that would almost certainly be wrong. I appreciate that Mish tries to predict what will eventually happen, though (wisely) not when. Therefore I remain widely diversified in all types of investments.

For example, Mish is a big proponent of gold and allocates a lot of his portfolio to gold. I keep roughly 4-5% in gold. He believes crypto is worthless. I have a little bit of bitcoin. He believes the stock market is ready to swoon (a recurring theme?). I have a portion of my overall portfolio in stocks, diversified all over the world.

What is my point? When you are well diversified, you don't care as much about the future of interest rates.

Anda
Anda

How long before, or since ?

(Courtesy trading economics)

anoop
anoop

isn't this a good thing since a steepening curve signals growth?

Goblueguy
Goblueguy

Always the same number of sellers and buyers. Maybe they could say seller were more motivated than buyers, or vice versa

bradw2k
bradw2k

When Jim Bianco and Lyn Alden say inflation continuing to edge up is quite likely, I listen. On the other hand Dave Rosenberg sees no significant rising inflation in the details (free month of his service is nice, but $100/month to continue? sheesh).

Alden says she is neutral on gold for 6 months, but long-term bullish. And IF the Fed executes yield curve controls, resulting in real yields for 10-year treasuries to go down (they are bouncing around -1% right now, she says), gold could go on a tear.

FromBrussels
FromBrussels

Will the DOW stand at 40k by year end ? Wouldn 't be surprised ....The financial, CBs manipulated system has gone totally berserk, everything is possible now ! Put them all in, your chips, with interest rates going even lower , the only way for already overvalued assets is UP!

Eddie_T
Eddie_T

Test.

Screen Shot 2021-02-15 at 2.02.05 PM


Global Economics

FEATURED
COMMUNITY