Mayhem in the Treasury Market as Powell Adds 50 Basis Point Rate Increases (Plural) to Menu, QT “As Soon as” May

10-year rate reaches 2.31%, 30-year fixed mortgage rate reaches 4.66%. And why the funny kangaroo-shaped yield curve says nothing about the economy.

By Wolf Richter for WOLF STREET.

Another day, another defeat in the bond market. Bond yields are an inverse reflection of bond prices: rising interest rates mean bond prices fell. Ten-year government bond yields currently peaked at 16 basis points, reaching 2.31% in afternoon trading, their highest since May 2019.

One of the trigger points may have been — although you can never really tell with these crazy markets — that Fed Chair Pro Tempore Jerome Powell spoke, confirming the Fed’s newly discovered religion by using its monetary tools to reduce inflation. , at least a little bit, while trying to achieve a “soft landing” or at least a “soft landing”.

His speech included a line stating that the Fed could impose larger rate hikes, such as 50 basis point rate hikes, (possibly multiple) if necessary to get there:

In particular, if we conclude that it is appropriate to act more aggressively by raising the federal fund rate by more than 25 basis points during a meeting or meetings, we will do so,” he said.

Here we go. Two-year government bond yields rose 18 basis points to 2.13% today, the highest level since May 2019:

All government bond yields are still ridiculously below CPI inflation, which peaked at 7.9% in February, and they have a lot of catching up to do, remaining very negative in real terms.

The average 30-year fixed mortgage rate rose to 4.66% today, the highest since December 2018, according to daily data from Mortgage New Daily. And all mortgage rates, while peaking, remain negative in real terms, even for subprime mortgages:

And nearly all corporate bond yields, though they too have risen sharply, remain negative in real terms, including most junk bond yields up to the single-B category, which are considered “highly speculative” – ​​here’s my cheat sheet on corporate bond ratings by rating agency.

You have to go all the way to the deep junk, to bonds with a CCC rating and below to beat inflation, where you face everything from a “significant risk” of default to actual default, which is now needed to keep inflation in check. while losing some or all of your capital, thanks to the most reckless Fed ever.

The yield curve is groaning under the Fed’s massive balance sheet.

The weight of the Fed’s giant balance sheet weighs on long-term yields that the Fed has suppressed for years with trillions of dollars worth of QE since 2008 and most radically since March 2020. QE has stopped, but the weight is still there, the $5.76 trillion in Treasury bills and the $2.73 trillion in MBS, for a combined $8.5 trillion in securities. The Fed has taken $8.5 trillion in bonds off the market and the yield curve reflects that.

The Fed is talking about lowering the weight. Quantitative tightening “could come as soon as” in May, Powell confirmed today, adding that no decision has been made yet. But if it starts, it won’t come soon enough.

At the same time, long-term yields are suppressed by the Fed’s balance sheet, while short-term yields from one month to three months are tightly controlled by the Fed’s policy rates.

In the one to three year range, it’s a three-way tug-of-war (why hasn’t anyone invented that sport yet?) of years, and the Fed’s gigantic balance sheet sitting on top of long-term returns and long-term returns and weighting them down.

This produces a funny kangaroo-shaped yield curve, which is steep forward at the three-year yields, but essentially close to the 10-year yields, a bump at 20 years, followed by an inversion between the 20-year and the 30-year yields. :

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