“Yellen’s Surprise Comments Jolt Bond Market”

You could have knocked me over with a feather! (read “surprise comments” article here)

Who knew?

The Committee intends to gradually reduce the Federal Reserve’s securities holdings by decreasing its reinvestment of the principal payments it receives from the securities held in the System Open Market Account. Specifically, such payments will be reinvested only to the extent that they exceed gradually rising caps. Initially, these caps will be set at relatively low levels to limit the volume of securities that private investors will have to absorb. — Janet Yellen

The unwinding of Quantitative Easing (QE) is to be very gradual, so as to not roil the markets (bond or stock). This is a continuation of the cautious, data-dependent Fed policy that has been in place for years.

Once we start to reduce our reinvestments, our securities holdings will gradually decline, as will the supply of reserve balances in the banking system. The longer-run normal level of reserve balances will depend on a number of as-yet-unknown factors, including the banking system’s future demand for reserves and the Committee’s future decisions about how to implement monetary policy most efficiently and effectively. The Committee currently anticipates reducing the quantity of reserve balances to a level that is appreciably below recent levels but larger than before the financial crisis. — Janet Yellen 

Again, the operative word is “gradually” and there is a new, but not surprising element, “reducing … the quantity of reserve balances to a level that is appreciably below recent levels but larger than before the financial crisis.”  The economy has grown appreciably over the past 8 years, simply making it necessary for the Fed to keep a larger balance sheet.

Complete Text of Janet Yellen’s Remarks

How bad was it in bond land yesterday?

The United States Treasury 10-year note closed the day before (7/11/17) at 2.3945%. Today the 10-year closed at 2.3124%, down .009% in yield as traders rushed to buy (or cover shorts) in light of the not-so-new revelations by Janet Yellen. Those notes traded as low in yield as 2.14%, June 26, 2017. Who got hurt today? The bears, those who were short the 10-year… people anticipating that chairman Yellen would strike a more hawkish tone (i.e. saying policy was to remove excess reserves at a more rapid rate and that the Fed was to be more aggressive on raising the Fed Funds rate).

Bottom Line: None of the above represented a “surprise” or new policy thrust except for the bond bears and financial journalists at CNBC who wrote this headline and the title for my post. My opinion is that fear of future Fed action in the removal of QE and tweaking the Fed funds rate higher will continue to be no-news news that the media will present as news and use to scare you to keep your attention. Betting on the media’s/pundit’s infinite wisdom on this topic has not been a high return strategy.