I thought the Fed was supposed to be raising rates? Hmmm.... Could easily be (MIS)interpreted as NOT empirically supportive of our theoretical statement that "the Fed sets the interest rates".
Hope no one out there shorted the bonds.
Treasury yields fall to nine-month lows amid oil slide - U.S. sovereign bond prices continued to rally on Wedne... https://t.co/gMTkfQQLd3— Taral Pandya (@taralpandya1) February 3, 2016
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Discounting NIRP!
I think you might have called it.... they might have "cash flow " problems and will have to do a nirp to get some munnie....
Falling rates: economic cockroach detector.
This is not really a theoretical problem; it is just a sign that the market thinks the Fed is wrong about the strength of the economy, and it will reverse course (or at least stop hiking).
We would only start to hit a theoretical conundrum if the Fed was hiking the policy rate to 4% and announced that it was going to keep going, and the 10-year was at 0.50%. The current yield curve configuration still results in a plausible looking forward curve.
The cb influences the yield curve through the policy rate. It doesn't control it since there are other expectations involved wrt to different types of risk. To exert control along the yield curve the cb would have to specifically target yields using either price or quantity.
"To exert control along the yield curve the cb would have to specifically target yields using either price or quantity."
The Fed can't target long term Treasury yields by specifying a quantity of bonds it will buy at given maturities. Targeting quantity is what Quantitative Easing was all about. The Fed can't simultaneously target supply/(quantity) and yield/(price) any more than one can hit two birds with one arrow. During WW2, the Fed and Treasury Accord capped short and long term interest rates at 0.375% for T-bills and 2.50% for long term bonds.
If you believe that quantity influences market price it can.
One purpose of QE was to flatten the yield curve by massive purchases in the bond market. The thinking was that tsys are benchmarks for other rates, and the Fed wished to keep mortgage rates low to prevent a deeper decline of housing prices, which would have adversely affected already weakened banks.
Now the Fed has enough bonds in inventory to drive the price down, steepening the curve, if it would choose to do so.
"One purpose of QE was to flatten the yield curve by massive purchases in the bond market."
But just the opposite happened. Without exception, the onset of QE 1, 2, & 3 triggered sharp bear steepening selloffs. Just look at the charts. The reason why is that enough market participants equated QE with Fed money printing, hence inflationary so they initiated "RISK ON" trading strategies like selling inflation sensitive long duration bonds first, selling the Dollar, and buying equities, commodities and credit. It was all part of the same trade. As the respective QE programs came to an end, the RISK ON trades switched to RISK OFF.
Mortgage rates stayed low though, which is what the Fed was aiming at to stabilize the housing market.
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