No Sooner Did 10-Year T-Rate Cross 1% Than Fed Felt It Necessary To Dampen Budding Bearish Mood Among Bond Investors

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Last week, Fed officials threw cold water on incipient taper talk, making it clear they would continue to purchase treasury securities. This followed a backup this month in rates in the long end of the treasury yield curve, with the 10-year crossing one percent (SPTL). In a highly leveraged economy, higher rates can bite sooner than many think possible. The Fed will do all it can to make that from happening.

Last week, several Fed officials, including Chair Jerome Powell and Vice Chair Richard Clarida, sought to nip budding tapering talk in the bud; the 10-year treasury yield, up eight basis points at Monday’s high, ended the week down a basis point to 1.11 percent.

Fed officials were reacting to a mini selloff in bonds in the prior week. On January 6, the 10-year jumped 9 basis points to reclaim one percent – up 19 basis points for the week. Rates had not taken the one handle since last March.

Technically, this can prove to be an important breakout. Several times between June and December last year, the 10-year retreated from just under one percent. Concurrently, for the past five months in particular, a pattern of higher lows had been in place.

Longer term, rates remain within a three-decade-old descending channel. There was a breakout in 2018, but that proved false (black arrow in Chart 1). There is major resistance just under 1.4 percent, which also corresponds to the upper trend line of the channel. In the right circumstances, bond bears (on price) have a shot at this. Although after Fed officials intervened, last week’s candle left behind a long upper shadow on the weekly.

Behind the latest breakout in the 10-year yield was rerating by bond vigilantes of inflation/growth expectations in the wake of Georgia Senate runoff elections on January 5. Democrats won both seats, taking their tally to 50, with an ensured tie-breaking vote from Vice President-elect Kamala Harris. Democrats already control the House and will the White House at noon tomorrow.

The recapturing of one percent caused a small subset of markets to speculate that it would not be long before the Fed, too, took note of changing market sentiment and stopped purchasing these securities. Speaking to the press at the end of the December 15-16 FOMC meeting, Powell said the central bank would buy $120 billion/month in mortgage-backed securities and treasury notes and bonds. If the pace is sustained for the next six months, by July it would hold $6.9 trillion in these securities.

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