Quote:
Originally Posted by Shuffle
The market isn't paying attention to the Fed anymore. China's credit injections are far more relevant and the Fed is being relegated to bystander status.
I'd suggest to read Eugene Fama's work and you'll see the Fed's operations in ER regime are net neutral. It can and does cause short term distortions that quickly evaporate, but that's all.
These temporary moves are enough to capture the attention of our chipper little friend here GrimReaper, who doesn't seem to understand much, but look! There is the 10Y right back over 2.5%.
Meanwhile, Fed Funds have risen above interest on excess reserves-- meaning the Fed can't even control their basic target rate. If you go and read the Fed minutes they have explicitly told you:
1. they don't have the ability to control short term rates
2. they are going to abandon targeting the Fed Funds rate altogether
3. they will begin to target the overnight bank funding rate instead
4. they expect inflation will overshoot their 2% mandate
5. instead of tightening monetary policy in line with their mandate, they will shift to an "average" 2% mandate meaning they are cool with 3% and 4% annual inflation
Take all of these things together and it's clear the Fed is being usurped by the PBOC as the dominant monetary authority in global financial markets. The divergence between Fed and PBOC coordination began to show in 2018 and it's only growing this year. The Fed now has little or no control over interest rates. There is going to be a very substantial pickup in inflation-- all of those excess reserves the Fed thought they could force banks to hold with IOER are now going to start moving into the real economy.
Meanwhile, Treasuries are still in a 3 year bear market. They have already lost back half of their gains from the previous two weeks. There is still going to be record supply, year after year after year. The Fed has already told you to expect substantial inflation increases and they have also told you they will not act to tighten monetary policy when that inflation arrives.
Pretty clear in which direction the market will move over the coming months and years.
However, there's nothing stopping the Fed from cutting rates to zero or even negative in response to a stock market crash. As that will collapse the 3mo, the 10y will also collapse with it, at least initially until it explodes upwards if stagflation is your scenario.
If you want to play stagflation, why not just wait for treasuries to spike/gold to plummet after the market crash and the rate cuts, and then buy gold/short treasuries?
Basically, you are calling for the 10y rates to rise even in the face of ZIRP/NIRP and central bank manipulation right from the get go, but looking at all the other countries that have initiated NIRP like Japan, Germany, Switzerland, etc., that just doesn't seem all that likely.