Fastest Stock Market Rally In 90 Years

As we mentioned in a previous post, it seems the Fed needs to keep buying TIPS to keep the nominal rate from spiking. We aren’t talking about hyper inflation or rates as high as they were from the 1970s to the 1980s. However, a 4% 10 year yield would probably have a destabilizing effect on markets. That’s just a hypothetical number. We don’t know the exact rate the 10 year yield will become a problem. The Fed doesn’t want to find out when it will be an issue.

As you can see from the chart below, the Fed has now bought 23.5% of the TIPS market.

TIPS probably won’t be a good bet because as we mentioned in a previous post, CPI is being suppressed by low rent inflation. Some say the Fed is forcing the breakeven rate to increase by buying real yields. We think that’s wrong. Inflation expectations are increasing due to the recent spike in commodities prices along with the expectation for the economy to reopen. If the Fed were to stop buying real bonds, the yield would probably drift towards zero which would get the 10 year yield above 2%.

The media and the markets always like to get ahead of themselves. The calls for hyper inflation are just parroting old wrong talking points on QE combined with a timely cyclical call. Just because the long bond yield is rising, doesn’t mean it’s going to go up at the speed of a crypto asset. There is zero chance of the Fed hiking rates in 2021. The problem for some folks is they completely missed the reflation trade. Now they are overdoing it in the opposite direction. Predicting a 2% 10 year yield doesn’t get as many clicks as calling for a 10% yield especially now with the 10 year yield at 1.37%. However, it’s the best call. Peak paranoia is likely yet to come.

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