Taps Coogan – March 13th, 2021

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Wolf Richter, creator of the great website WolfStreet.com, recently spoke with Kerry Lutz of Financial Survival Network to discuss rising treasury rates and what they mean for markets and the economy.

 

Wolf Richter:

“I think the Fed is trying to tamp down on the exuberance in financial markets in a way without actually doing anything. They’re letting it happen (long rates rise) without changing their own monetary policy. Their own monetary policy is zero interest rates and QE… In theory, this could go pretty far if inflation expectations continue to rise… but at some point the Fed will say this is enough and it will step in to keep long term rates from rising further. I don’t know where that point is but that’s the big question. Is it 2% for the 10-year yield? …Or is it at 3%? A 3% 10-year yield would mean mortgage rates in the 4%-4.5% range and that will be really tough on the housing market… If it goes to 2% that will already be a very big move… A lot of leveraged positions will come undone and… you’ve already seen some of those ripple effects… It’s not just bondholders. These are hedge funds with complicated trades with huge positions on one side or the other… If this becomes disorderly, (the Fed) will unleash its QE or whatever it’s going to do, buy long term bonds and sell short term securities… But we’re not there yet. There is room for rates to rise if it’s in an orderly manner…”

Indeed, the Fed seems content to keep QE-infinity on autopilot at $120 billion-a-month despite a historic jump in the treasury issuance that is going to hit public the markets this year. 

The tricky question is how the Fed plans to hold down long rates once we reach its uncle point. With the traditional policy of hiking overnight rates apparently off the table ‘for years,’ that’s going to take some very creative thinking. Shifting its treasury purchases to longer durations, while the Treasury shifts issuance to shorter durations might help, but that’s small medicine in the face of an endless stream of multi-trillion spending bills.

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