Not Tough Enough

Summary

• If the Fed wants to hold yields down, they will have to actually do something. They made numerous statements, but any actual action was missing from the pronouncements.
• Now yields have surged overnight, with the 10-year Treasury at 1.73%, which is back 24 basis points from yesterday's close. We are verging on last year's high yield, which was 1.88% on January 2.
• The Fed's bet on a rapidly growing economy is just that, a bet. Higher interest rates will not help this wager. Inflation may be one cause of higher rates, but it's just the easiest to blame.

As I stated yesterday, if the Fed wants to hold yields down, they will have to actually do something. They did not follow this course. They made numerous statements, but any actual action was missing from the pronouncements. Words alone were not enough to hold rates intact, as I suggested would likely be the case.

Now yields have surged overnight, with the 10-year Treasury at 1.73%, which is back 24 basis points from yesterday's close. We are now verging on last year's high yield, which was 1.88% on January 2. The 30-year Treasury is now at 2.50% and down more than 1.375 points to begin our day. To add insult to injury, Spain issued 30 bonds overnight at 1.31%, which is 118 basis points lower in yield than its American counterpart.

You may thank the European Central Bank for the Spanish yield, as they have taken a much more aggressive path than the Fed. Just today, the ECB has stated that they will make 330.5 billion Euros in long-term loans available to their banks. They are stepping up and actually doing something, and not just mouthing hopefully reassuring words.

This is why I think that we will arrive, at some point, to a "One Moment Please" juncture. This will be when Ms. Yellen has a small talk with Chairman Powell, at the request of the Biden Administration, indicating their desire for the Fed to engage in some action, or actions, to lower the cost of America's borrowing. So much more convenient these days to have the Fed to the heavy lifting, when the Congress is ripe with political wrangling and strife.

The S&P 500 futures are not beginning the day well either. It may be dawning upon the markets what the costs of higher interest rates will do to not just the yields of Treasuries, but the yields of mortgages, corporate borrowing, bank loans and other credit-related instruments. The price to pay for higher yields is not just confined to the Treasury markets, I can assure you.

Chairman Powell's comments yesterday reminded me of a saying from my youth in Kansas City.

"Any cowboy can carry a tune. The trouble comes when he tries to unload it."

Well, Jerome, you sang the song, you danced the dance, but you left your six shooter in your room. Pretty tough to control the crowd with words when the rest of the boys have a loaded pistol near at hand. Chairman Powell's story got told alright, but words alone did not get the job done, as evidenced by the markets this morning. More of the same is likely to come now, until the Fed actually shows up with some ammunition.

"Caution" is now the byword of this Rodeo. In the days of olde, we asked, "Who is that masked man?" In those days, the answer was the "Lone Ranger." In these days, when the question gets asked, the answer is the "Loan Arranger." It's funny how history sometimes rhymes. In any event, where the heck is Tonto when we need him?

Further, the Fed's bet on a rapidly growing economy is just that, a bet. Higher interest rates will not help this wager. Inflation may be one cause of higher rates, but it's just the easiest to blame. The lack of any actionable steps by the Fed may well turn out to be the main culprit if something substantial isn't done.

What can be done, could be done, is an increased buying of longer-dated Treasury maturities, an "Operation Twist." The Fed could also buy more Treasury securities and less Agency securities. Another avenue open to the Fed, accomplished by the flick of the wrist with the reins, would be an expansion of their balance sheet. There are any number of options here, but one or more will have to be enacted, in my opinion, to keep interest rates in check. The Chairman's words of yesterday are falling on deaf ears.

"Hi, Ho Silver" just won't cut it.

It also has to be "Up, Up and Away."

Original Source: Author

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