Many market participants continue to be surprised by the resiliency of the stock market, even in the face of rising bond yields and the recent scene at the capitol.
Banks tend to prefer steeper yield curves, and that’s exactly what the market has been giving them. This is the second longest stretch since the inception of the TIPS market where 10-year yields remained below the inflation rate, as priced by the TIPS market. Real yields, as measured by the 10-year yield minus the 10-year inflation breakeven rate that the TIPS market is pricing, has been retesting the lows set in late August, at below -1%. The Fed’s overall positioning seems to be to let long-duration yields rise until it reaches a pain point for the market, similar to what occurred in Q4 2018.
They’re pegging the short end of the yield curve near zero, well below the prevailing inflation rate, and taking excess Treasury supply off the market to the tune of $80B/month, but otherwise letting the private market price some of those remaining long-duration bonds.
They indicated as such with their latest FOMC minutes release
« Participants generally judged that the asset purchase program as structured was providing very significant policy accommodation. A few participants underlined the importance of continuing to evaluate the balance of costs and risks associated with asset purchases against the benefits arising from purchases».
Source: Lyn Alden Schwartzer | ElliottWaveTrader
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