Author: Vera Chang Published: 9/5/2021
Source: www.verachangmortgage.com
Wall Street has lost interest and patience with historically low yields on U.S. debt after the economy opened up. Bill Gross, co-founder of PIMCO, a fixed-income investment fund, even said in an interview with Bloomberg that Treasury yields are so low that "bonds are trash" and he predicts that 10-year Treasury yields could reach 2 percent within a year (currently 1.3 percent).
Such claims are radical, after all, there are many means and ways of investing, but for these capital market veteran who have gone through countless investment cycles, the current monetary policy is hardly convincing. For example, U.S. bond yields and economic fundamentals are seriously out of touch.
Looking back at how we got here today, first, at the beginning of the epidemic, the Fed cut its already low benchmark interest rate to 0 at the speed of light, and the U.S. financial system did not have a negative interest rate mechanism (nominal interest rate), so in that sense, there was no room for further downside; In addition, the Biden administration introduced a series of stimulus policies to benefit the people directly, simply put, door-to-door money, resulting in an instant surge in bank deposits. It is a surprise and a shock, because banks do not know how to invest the excess liquidity at a profitable rate.
The consequences of all those monetary or fiscal reactions are soaring house prices, inflation and very low returns on bond yield (except the stock market). Everyone, including Federal Reserve Chairman Powell, knows that this is not a long-term solution, so the expectation of tapering (reducing the size of QE) emerges, tapering is not an easy thing to do, it can backfire, and we have a lesson from the latest round:
Source: FactSet, as of 7/28/2021.
10-Year US Treasury Yield (Constant Maturity), 12/31/2012 – 12/31/2015.
Our most recent tapering began in early 2013. U.S. Treasury yields started to rise at the start of the Fed's congressional testimony, rising 100 basis points at their peak in December. The author herself was unfortunate to encounter this period, the first mortgage rate as high as 4.5%.
Ten-year U.S. treasury yield is a very important indicator for the U.S. economy. It is not only an anchor for the bond market, but also affects the stock market and many investors, because of its risk-free yield measure status.
Historical data tells us, the Fed's 2013 tapering did bring a big shock to the stock market, which fell 5.6 percent in the first two months. Although the stock market has started a new rally after all shocks were priced in, but at least as you can see it, in the short term (months to a year), tapering still changes the look of whole capital market.
This time, to avoid increased volatility, especially as we are not yet fully out of the Pandemic, the Fed will be particularly careful in every words out of mouth, how to implement the tapering and control the extent and speed of interest rate increases, should be the next important agenda of the Federal Reserve. Let's wait and see.
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