Ha, not even central bankers understand why long-term rates are so low, we are in trouble when the Fed signals end game and the yield curve massively inverts during their pausing cycle before shifting monetary policy towards easing. Even though the inverted yield curve and continued flattening doesn't necessarily signal economic weakness it does signal peak/trough Fed rate periods and the shift into a transition period for the Fed. In other words, the flattening of the yield curve signals that the Fed is nearing an end point in their current cycle (exact point who knows where, my guess is they overshoot to 5.50% with Ten-year yields sticking around 4.50% to 4.75%) and should fully invert (to maybe -100 bps) during the transition period. Just a guess.
Hi Mcurto, Surdo Yes read it too Big Ben covered a lot of ground just to let everyone know he's on top of the game. I think. And, the FED's policy is status quo: next rate increase tuesday. He made some interesting points though. And, I agree with you, a flattening/inverted yield curve always leads to an easing policy. But if the FED left rates the same for six months would that be considered an easing policy by the Bond market? If I look at my charts, I see short term rates turning over and long term rates rising. The rise in long term rates should be consistent over a long period of time. Short term rates can come down and then move higher than they are now down the road. In other words I still see rates moving higher longer term across the board. fwiw
I think the bond market sees a stable policy (the Fed leaving rates alone during a transitionary period from either a rate hike or rate cut cycle) as a final push to contract risk premiums (flatten the yield curve or flatten/narrow any spread product such as Swaps, Agencies, etc.). These final gasps of risk premium contractions seem to be followed by a little chop in inversion for a few months, then a signal to monetary policy change, and then very quick and violent risk premium expansion (yield curve steepening, spread product widening, all hell breaking loose as long-term trades are unwound and even reversed into steepeners). This is probably several months or maybe even a year down the road, depending on how near we are to the end of the rate hike cycle.
curve steepening to be fought by every Asian banker in sight..... it takes a great deal of money to finance American insolvency....
It would make sense that long-term rates would rise over the next few years, Greenspan and Bernanke seem to have also been led to believe that over the years, but doesn't mean it will happen. I think the only two things that change the path of long-term rates dramatically are: (1) a secular change in inflation out of this inflation target range of 2-3% or whatever "stable price levels" we currently have and (2) Asian central bank asset diversification in extremely large magnitudes (like the Russian default, which will obviously never happen). So in all likelihood, if you want to play long-term rates, look for relative value opportunities to short-term rates instead of outright plays.
I'd be suprised if the Fed goes to 5.5%. Based on my reading of recent speeches, I don't think there is any question that some voting and non-voting members of the FOMC want to stop at 4.75 or 5. When I start hearing lines like "... we must remember that monetary policy changes work w/a lag" (Janet Yellen last week), that tells me that the FOMC is aware of a lot more than just the latest 8:30 economic report on CNBC. After the hike to 4.75% next week, my guess is that anything short of great economic numbers between then and early May will mean an end to the rate hikes.