The Federal Reserve System Open Market Account Holdings (SOMA) report for January 31st finally revealed the balance sheet unwind in action. Since the Fed announced their balance sheet unwind last year, the actual process had been proceeding at a snails pace, particularly with the mortgage-backed securities portfolio. The MBS instruments can take 2-3 months to roll off, so the MBS unwind has been virtually invisible until this week.
With a $21 billion drawdown in the latest week, including over $10 billion in agency MBS unwind, it becomes increasingly clear why the markets were puking all over themselves this week. Yesterday evening the yield on the 10-Year Treasury spiked toward 2.8 percent. With today’s January Employment Report showing a modest spike in hourly earnings, the yield eclipsed 2.84 percent. Of course there are several pundits talking about the end of the bond bull market. As they say, never waste an opportunity to talk your book.
All things considered, it looks extremely premature to call the end of the bond bull market. The reasons are so simple even a Layman could understand it. Once again the Fed is behind the curve, attempting to raise interest rates and unwind that massive hedge fund after they spent the last 9 years enabling budgetary deficits and levitating zombie financial institutions and corporate largesse. Assistance was of course provided by other global central banks as part of the liquidity love fest, and Washington’s renewed love affair with deregulation is cutting a direct path to the trough for Wall Street swine.
“If your only tool is a hammer, every problem looks like a nail.”
Comically enough, in the same week markets are throwing up all over themselves with a modest spike in yields none other than the maestro himself, the master of babble and doublespeak, Alan Greenspan, says we have a stock bubble. Go figure! Actually Greenspan now says both bonds and stocks are bubbles. This is interesting because when he was the Federal Reserve chairman, Greenspan couldn’t see a bubble standing right in front of him. While he was making mincemeat of the English language, Greenspan was gripped in the worship of virtuous market ideology. Greenspan is the guy who famously told us you can only detect bubbles after they burst.
If that sounds familiar, it should. Ben Bernanke, the man with the QE printing press at his disposal, couldn’t see the mother of all housing bubbles hiding in plain sight. His comments leading up to the housing crash and the Great Recession are mystifying. Janet Yellen was also loathe to call the current market environment a bubble regardless of the evidence to the contrary. Last year Yellen said she does not expect another financial crisis in our lifetimes. If you are sensing a pattern here, it probably has something to do with the real job description of central bankers in general and the lies they spin to keep themselves in a job.
“It’s difficult to get a man to understand something, when his salary depends on his not understanding it.” Sinclair
If you are in the market to buy or sell a home, you could be forgiven for being a bit concerned about recent developments. The rise in mortgage rates during the last 5 weeks has certainly caused some grief for mortgage bankers. It’s certainly affecting the affordability of homes. Rising rates could stop the housing recovery dead in its tracks. The abrupt shift in sentiment this week in the markets suggests the financial predators on Wall Street understand this all too well.
The Fed kept filling the punch bowl for far longer than they should have. The ECB still has their key rate at ZERO.
“At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council expects the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases.”
End of the bond bull market? I think not, and neither does Lacy Hunt. If the markets are tripping over a measly 1.5% target Fed Funds rate and a modest $21 billion unwind of the Fed’s enormous hedge fund, I can only imagine what they’ll do when the Fed unwinds $20 billion per month in agency MBS and $30 billion per month of Treasuries.
The addict has been receiving their daily dose of heroin for years beyond what was appropriate or rational. Wall Street greed and speculation have hit new heights as a result. Now that the requisite amount of lemmings (aka U.S. consumers) are now once again levered up to their eyeballs, it appears the Fed is set to activate the wealth extraction machine which will once again unleash a wealth transfer into the pockets of their true constituents. It’s a system that only a central banker could love.
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