10 Reasons Why The Fed Shouldn't Fight The Bond Vigilantes

Historical Stock, Securities, Certificates, Fund, Bonds

On Friday, Bank of America's controversial CIO Michael Hartnett prompted the usual firestorm of confused reactions across Wall Street when he concluded that the "uber-dovish" Fed had backfired and that vigilantes were now bullying Powell into Yield Curve Control (which he predicted would kick in once the 5Y yield surpassed 1.25%), and also shared three strategies on how to trade this.

It turns out Hartnett is not alone in assessing that the Fed has been bullied by the bond vigilantes: in a note from Deutsche Bank's Alan Ruskin titled "10 reasons for Fed not to fight the bond market", the macro strategist reveals "ten important reasons" why assets markets and FX should expect continued Fed aversion to fighting market forces for higher bond yields. In other words, the Fed may well accept higher (and much higher) yields before it all comes crashing down and whether he wants to or not, Powell will be forced into YCC at which point it's pretty much ballgame for capital markets as USSR-style central planning will be the last thing that stands between the abyss of a hyper-financialized economy where financial assets are 600% of global GDP  and the continued prosperity for the 0.001% ... and the continued prosperity for the 0.001%.

So without further ado, here are Ruskin's ten reasons why markets should expect "continued Fed aversion to fighting market forces" for higher bond yields:

1) Absolute yields are still low by almost any measureand extraordinarily low relative to expected nominal GDP growth – by that measure policy and rates are erring on the side of too easy.

2) It's not all about the price of money, the quantity of money matters, and M2 growth is near all-time record highs.

3) Don’t shoot the messenger. Market signals are invaluable. Expectations, and real yields are much spoken about and already distorted by QE, don’t add to these distortions.

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