Yield Heading Lower ?

The following via Ron Griess of The Chart Store

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Category: Federal Reserve, Fixed Income/Interest Rates

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

18 Responses to “Is the Fed Pushing on a String ?”

  1. Chief Tomahawk says:

    What’s the over/under on exiting home sales tomorrow being HORRID?

  2. RW says:

    Yes, the Fed has been pushing on a string for some time: We are against the zero boundary and real interest rates are negative so there is nothing left but QE.

    Existing home sales are going to stink but if they are as low as Tom Lawler projects (3.95 million SAAR – ht Calculated Risk) I’d hate to see the under of that.

  3. sahillyard says:

    What’s more troubling is what the low long-term interest rates tell us about investors’ view of the economy: low inflation and low growth. The rate is lower than the rate just before the collapse. Were it not for the Fed holding down short term rates, wouldn’t the yield curve be inverted?

  4. VennData says:

    The Fed – like inflation itself – is always and everywhere “between a rock and a hard place” and “pushing on a string.”

  5. Mike in Nola says:

    Rosenberg’s letter today gave a number of quotes from Bernanke earlier this decade. All indications are he just knows a few tricks and will keep trying them. If QE 1.5 don’t work, he’ll go in stronger pegging the rates down.

    I’m still hoping for that 2.5% long bond rate so I can cash mine out at a tidy profit. When it gets down there, the stock market will likely be in the dumps like last time it bottomed and there should be some solid dividend stocks around that will survive a least through the cycle. (Not long run, since we know what happens in the long run.)

  6. The Fed is pushing on a fucking anaconda*–one of those monster types from the Amazon River basin. They’re gonna piss it off eventually, at which point it will turn and wrap itself around its tormentor, squeezing the life out of it.

    *roughly, ZIRP, and its implications for prices, demand, etc.

  7. franklin411 says:

    I don’t play with bonds, but why couldn’t the Fed simply buy state/local bonds? At least in California, the vast majority of recent job losses are due to states and local government laying off essential workers (public works, maintenance, safety inspectors, etc…). Demand for government services is at an all-time high with millions out of work and the piper of low taxes coming due in the form of crumbling physical/educational infrastructure.

  8. Chief Tomahawk says:

    RW, I just bought some VIX call contracts (cause I’m thinking tomorrow might not go so well….)

  9. Mike in Nola says:

    F411: I believe the Fed is supposed to be limited in the credit quality that it can buy. Most Muni bonds are suspect these days. State and Local government pension plans are underfunded by trillions and that will have to come out of tax revenues competing with interest payments.

    Some of the stuff in the Maiden Lane portfolio was crap and they knew it. It brought questions from Congress. Considering the real estate markets, some of those mortgage backed securities it bought is probably the same. While they got away with it for the present, they will likely be facing a more hostile crowd next year. It won’t just be the tea partiers – even the Dems will have to look more hawkish.

  10. @Mike in Nola; F411:

    Are you kidding me? The Fed can do damn well what it pleases. Or, at least damn well what the political zeitgeist will accept. Which is almost anything, considering average Joe doesn’t even know what the Fed is or does (except maybe set interest rates). If the Fed’s not buying state and muni bonds, perhaps it wishes the states to fail, instead of the Fed? Always remember in a Hobbesian world of conflict, where all groups are in constant conflict against all others, the Federal government and state governments are antagonists. Of course, about 150 years ago, we found out which group will always win.

  11. franklin411 says:

    @Mike, TC
    I looked around (wasn’t easy…apparently, Fed arcana can’t compete with Heidi Montag’s boobs), and apparently, other lawmakers have asked this question too. Rep. Paul Kanjorski asked the Fed why they refused to buy state/local bonds, and Bernanke said that the Fed’s authority to do so was limited.

    What’s more, Bernanke said he didn’t want the authority to do so, since that would limit the Fed’s political independence. Ha! That’s just crazy-talk. The biggest threat to the Fed’s political independence is the idea that the Fed is powerless to act to address the crisis, not the risk of funding very stable state/local debt that the US government is ultimately responsible for anyway (does anyone really think the Fed/Treasury would…or even could…allow California to default?).

    http://www.bondsonline.com/News_Releases/news12100802.php

  12. franklin411 says:

    Apparently, Obama proposed giving the Fed the authority to lend to the states/cities as well in Jan 2009. Bernanke doesn’t strike me as the type to leave a potential tool unused, so maybe it really is a cabal of inflation-freaks on the Board who are gumming up the works.

    In the old days, this kind of problem was easy to fix. You’d just have the FBI wiretap the ones who were the problem, dig up some good dirt on them, and give them the option of acting patriotically or facing the firing squad!

    http://uk.reuters.com/article/idUKN0852763520090108

  13. ashpelham2 says:

    F411@2;52,

    Not only do I think that the Fed would do anything to prevent CA from defaulting, I happen to think that the Fed has probably done some things to limit the media access to information about CA’s real municipal issues.

    I happen to think CA should have already defaulted by now, again, if all was well known.

  14. @f411: It’s a good point that the federal government probably wouldn’t let the states default, but I think it’s debatable. What happens if California defaults (as opposed to say the GSE’s)? Which is another way of saying, who owns California’s debt? If it is mainly Californians, that may be why the Fed doesn’t want to get involved. If instead, a large cohort is owned by foreign investors, which may very well be the case (I personally don’t know), I think the calculus tilts in favor of rescue. Of all the other things offered as reasons for the huge GSE bailouts, one that is often overlooked is that much of the debt of the GSE’s was/is held internationally. In some respects, the GSE’s were funding our trade deficits. And you don’t want to default on international obligations unless there is no other recourse.

  15. IS_LM says:

    Why assume members of the FOMC have any understanding of what the string is? After all, the place is littered with Bush hacks like Kevin Warsh, who bought his appointment. Young Kevin is worried that financial reform will stiffle growth-enhancing financial innovation that gave rise to the phenonmenal 1.5% average growth that his guy presided over.

  16. call me ahab says:

    funding very stable state/local debt that the US government is ultimately responsible for anyway

    a little blast from the past Franklin-

    http://upload.wikimedia.org/wikipedia/en/7/77/Ford_to_City.PNG

    it appears that NYC made it back from the abyss anyway

  17. insaneclownposse says:

    @franklin411:

    the Fed already has the authority to purchase State and local debt. Here’s a link to a Federal Reserve paper that details what assets the Fed can legally purchase. Go to the table on page 20.

    http://www.federalreserve.gov/pubs/feds/2004/200440/200440pap.pdf

    The Fed can pretty much do what they please.