Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Bond Market Week In Review: Powell Gets The Message

By Hale StewartBondsJan 06, 2019 12:12AM ET
www.investing.com/analysis/bond-market-week-in-review-200373094
Bond Market Week In Review: Powell Gets The Message
By Hale Stewart   |  Jan 06, 2019 12:12AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

Summary

  • Fed Chairman Powell got the message from the markets.
  • Other Fed governors are now taking a wait and see attitude.
  • This is good, because the yield curve continues to narrow.

As we start a new year, the central question is will the Fed change course and slow or even drop its pace of rate increases. This week, several Fed Presidents offered their respective opinions indicating that was a distinct possibility.

Fed President Powell spoke at an economics convention on Friday. He made two very important statements. First, he said he would not resign if asked to by the President. This helped to quell market concerns about the potential conflict between the President and the Fed Chair. Second, he stated the Fed may be pausing in its assessment of the economy and interest rates (emphasis added):

Jerome H. Powell, the Federal Reserve chairman, said on Friday that low inflation would allow the Fed to be “patient” in considering whether to continue raising its benchmark interest rate, giving the central bank more time to assess whether economic growth is slowing and helping to calm jittery financial markets.

This is a very encouraging development. Many commentators (myself included) have argued that the Fed's projected policy rate increases for 2019 were not warranted when considered against a backdrop of slowing global growth and increased uncertainty caused by trade tensions. It appears the Fed has gotten the message from the markets and could be altering course accordingly.

Dallas Fed President Kaplan - a non-voting president - is calling for a pause in rate hikes. From CBS MarketWatch:

“We shouldn’t be taking further action until some of these uncertainties resolve themselves, and I think that could take several months,” Kaplan said in an interview on Bloomberg Television.

The Fed can afford to be patient because inflation “is not running away from us,” he said.

Central to Kaplan's thinking is the recent volatility and drop in the financial markets, which he believes are caused by slowing international growth, tightening credit spreads and a slowdown in interest-sensitive sectors. He also noted that according to Fed projections, interest rate increases will exert a larger slowing influence on the economy in 2019, adding to the slowdown argument.

Richmond Fed President Barkin (another non-voting member) also gave a speech, in which he argued that due to low population and productivity growth, we can expect the U.S. economy to grow at a slower rate over the next 5-10 years. As for current conditions, he noted that (emphasis added):

But as we enter 2019, I hear a lot of concern. Some is environmental, driven by trade or politics. Some is market driven, as volatility has increased and the yield curve has narrowed. Some is margin pressure. But overall, the question I hear most is, “How long can this growth continue?”

In addition to extensive analytical resources, the Fed also has deep ties to their respective communities. They regularly discuss economic developments with community leaders to get their take on the conditions on the ground. Remember: concern prevents activity; if business leaders see too much risk, they'll simply stay the course.

It appears that the Fed is listening to the markets, meaning the program of rate hikes may be on pause for at least the next meeting. That's fortunate because the bond market continues to behave as if this expansion is nearing an end.

First, a bit of history, which this graph illustrates:

US 10-Year Treasury vs Fed Funds Rate 1955-2018
US 10-Year Treasury vs Fed Funds Rate 1955-2018

Two forces are at play in the standard yield curve inversion. The first is the Fed raising short-term interest rates (above in red). The central bank starts raising rates at some point to either "normalize" interest rates, stave off inflation, or both. Then, towards the end of the expansion, traders start to buy the long-end of the curve, believing (usually correctly) that the Fed has over-tightened, which will lower growth and, subsequently, inflation.

We're starting to see the long-end of the curve come in:

30Y vs 10- Year Treasury Yields 2018
30Y vs 10- Year Treasury Yields 2018

The 10- and 30-year CMT have seen their respective yield decline by around 40 basis points over the last few months. Despite Friday's Treasury market sell-off, this trend is still in play.

As a result, the yield curve continues to narrow:

Yield Curve 2013-2019
Yield Curve 2013-2019

Given the dovish statements from various Fed governors over the last few days, I wouldn't be surprised to see the curve widen a bit, as the long-end of the curve sells off. However, at some point, the bond market will again focus on slower growth and the resulting lower inflation and start to buy the long-end again.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions.

Original post

Bond Market Week In Review: Powell Gets The Message
 

Related Articles

James Picerno
Desperately Seeking Yield By James Picerno - Apr 20, 2021 1

The recent rise in Treasury yields is on hold for the moment. So is the normally shifting sands of trailing yields for the various components of the major asset classes, based on a...

Stephen Innes
Stabilizing U.S. Treasury Yields By Stephen Innes - Apr 20, 2021

Stabilizing UST yields month to date gives investors more confidence in shorting the USD, but growth downgrades on covid-related setbacks in EM could slow this move. The USD...

Bond Market Week In Review: Powell Gets The Message

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (1)
Jim Todd
Jim Todd Jan 06, 2019 7:43AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Wrong...  the 2yr note did not react much.. so the Bond Mkt does not appear to be buying the Dovish interpretation you and others are giving Powell's statements ...
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email