The current spontaneous surge in the yield on 2-year US government bonds (red circle on the right-hand side of the blue curve) is already well ahead of the Fed's planned rate hike (the black curve below the blue one):
In other words, while the Fed is drumming up announcements every other day that it wants to make a series of short-term rate hikes, the bond market has already made these hikes...
Let's go back to two years ago, when the Federal Reserve adopted the opposite policy, that of a huge monetary easing to counteract the economic effects of lockdowns.
In this article from as far back as June 2020, the Fed managed to carry out the final phase of this programme, using only the power of media announcements, without actually doing anything concrete.
Specifically, the Fed announced at the time that it would start buying the bonds of publicly traded companies without limit to support their prices in the markets.
However, the Fed only needed to announce this purchase programme to achieve the desired effect, i.e. an increase in the prices of listed companies.
The actual purchase of bonds by the Fed was in fact negligible. On the contrary, the announcement of the purchases encouraged all the investment funds to do what the Fed did only to a small extent.
So it was the market that spontaneously made these purchases, not the Fed... and today, the script is repeated...
So this is not the first time that the Fed has skilfully used the power of the media to influence the markets.
As we have seen, this time as well, under the pressure of constant media statements by various Fed representatives, it is the market that is spontaneously completing the "work" that the Fed says it wants to do, already raising short-term rates to the very level that everyone expects them to reach.
And just as spontaneously, the market (not the Fed) has already pushed this rate hike to its extreme limit, as this chart shows:
The red circles highlight here that, historically, yields as they are now, i.e. at 4 standard deviations above their 52-week moblie average, have always marked the peak of the trend (from which the inevitable decline will begin).
This other graph shows that, again due to the spontaneous effect of the market, long-term rates (in particular, the 10-year rate) have also reached their upper limit (in our case, 4 standard deviations above their 52-week moving average, just like the 2-year rate):
Now, one has to understand that the bond market is not something unpredictable and moody like other markets, but it is a perfect mechanism on which global currency and economic balances depend. So it works like clockwork.
The bottom line is that, even if episodic and temporary further increases in these rates are still possible, we have reached the point where this perfect mechanism will turn back the clock, driving rates down and encouraging the return of deflation and the exit of inflation.
Even before the Fed has actually done anything (and perhaps without the central bank ever doing anything), the spontaneous rise in rates created by the market, which has already reached its extreme, should therefore produce the recessionary effects expected AFTER the Fed's eventual intervention, i.e.: a slowdown in consumption, higher charges for companies wanting to take on debt, etc.
In other words, as we said: deflation, not inflation....
And also, of course, rising bond prices, which move inversely to their rates...
I know, the bond bear market today seems unstoppable. And interestingly, just as would happen in a bear market in equities, when asset prices are down nobody wants them. However, that is when the statistical story suggests we should buy them.
This chart from Bloomberg shows us that the current bear market in bonds is one of the longest and deepest since the 1970s:
This other chart, tells us that it is precisely when the Fed starts a "tapering" that rates start to fall (the pink band indicates tapering, while the curve indicates rate trends):
So, there are no saints: falling rates and rising bond prices are inevitable after tapering, but especially after this tapering, which takes place in the most extreme market conditions ever recorded.
Today, as we have seen, rates have already reached the tipping point where the impeccable clock will bring them back down. So it is not a question of predicting the descent of rates, as the turning point is already here, in front of everyone's eyes.
That it is time to buy, not sell, is written in the charts, it is no longer just a hypothesis. And this is true not only in the bond market, but also in the equity market, which as always will follow the rise in prices in the bond market with a few months delay.
In any case, study well before making your choices. Mine is not an invitation to invest but my personal reading of the markets.
Thank you for reading.
