When Wall Street Cries, The Fed Coddles


March 2, 2021

My Dear Reader,

During the past year, it became ever more important to monitor the sad state of the US bond yields.  For those who may not have made the connection, the bond market can affect many different economic sectors, including mortgage rates; and therefore the real estate market in some areas, precious metals, and their value is in a way tied to bonds.  For the past four decades, treasury bonds have been in a slow decline from the over 10% yield that they enjoyed in the 1970s and 80s to the current single-digit environment that we are experiencing today.  And yet the powers that be at the Fed seem to be impressed with it.  Jerome Powell called the rise in yields “a statement of confidence.” Hedge funds, which have been raked over the coals recently, didn’t seem to agree. As Wolf Richter of Wolf Street wrote:
“And that [falling bond yields] was a good thing for the crybabies on Wall Street that had started to hyperventilate on Thursday, when the Treasury 10-year yield, after rising for months and accelerating over the past two weeks, had spiked to 1.52%, having tripled since August. By Thursday, all kinds of complex leveraged trades had been coming apart, and forced selling had set in. By historical standards, and given the inflation pressures now underway, those yields even on Thursday were still astonishingly low. But Wall Street had a cow, for sure.

On Friday, the Treasury 10-year yield dropped 8 basis points, part of the 14-basis-point spike on Thursday, and closed at 1.44%, still higher than where it had been a year ago on February 21, 2020.”

While this sudden panic did go relatively unnoticed in the mainstream, it does reveal the many different components and cogs that make the market turn.  The Fed naturally wants to assist the national housing market as much as it can in order to continue to drive economic growth in the wake of Government lockdowns and job-cutting environmental measures. They started with bailouts and money printing at the tail end of the Trump administration, which in the short term, prevented- or attempted to prevent a major financial crisis that could have crashed the financial markets and created a great amount of economic suffering. However, the inflation that comes with money printing actions also decreased the value of US treasury bonds, thus increasing the yield.  Wolf Richter pointed this out in the above quote. When Wall Street starts to fret, the Fed begins to act, and at the end of last week, bond prices, especially those with long-term yields, began to plummet.  

But the real question is, why does this matter to you and why should you care? The most immediate answer I believe is that long-term fixed rates for loans such as mortgages will rise, however, I doubt that they will rise by more than a point or three.  This still makes them more advantageous than a 15-year mortgage.  On the investing side, I still believe that fund managers will use the depressed price to allocate more funds towards bonds in conservative funds.  This will only exacerbate the problem that I have dubbed “The American Squeeze” as I don’t believe that the rate of return on these bonds will outpace the title wave of inflation coming down the road. This will only increase the value of metals and cryptocurrencies.

To your Creation and Potential,

Kevin Prendiville