Bond Market Continues To Defy The Fed: Raise Rates We Dare You!

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What if the Fed went a little too far raising rates? What if the Fed should not only stop raising but consider cutting them in the not too distance future? Crazy! Perhaps not as crazy as it may sound, just ask the bonds and currency market what they think, because they have a secret.

Bond Market

In the chart below you can see how much lower the 5-year yield has moved over the past month, while the short-end of the curve and long-end of the curve have remained in place.

yield curve
Then there is the spread between the 2-year and 3-month t-bill, which has been contracting to levels not seen since 2013 when the Fed was in the middle of QE3.
3 Month Treasury Rate Chart

3 Month Treasury Rate data by YCharts

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Dollar On The Cusp

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Now with a “tightening” cycle in place, the effective Federal Funds is now higher, then the 3-month treasury bill and the Funds Rate is just 20 bps below the 2-year Treasury, again nearing levels not seen since 2013.
3 Month Treasury Rate Chart

3 Month Treasury Rate data by YCharts


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Meanwhile, 3-Month Libor rates have also stopped going up as well, believe rates are not likely to rise much further.
3 Month Treasury Rate Chart

3 Month Treasury Rate data by YCharts

Does this seem like a Bond market that sees further rate hikes shortly? No, it does not. Either that or the bond market is predicting a recession is on the way, which based on the 2Q GDP of 2.6 percent doesn’t seem likely.  Nor does it look like a bond market that fears a Fed that is about to unwind its massive balance sheet, with rates on the long-end of the declining pretty steadily since the start of the year.
10 Year Treasury Rate Chart

10 Year Treasury Rate data by YCharts

When put all of this data together you get the chart below. 3 Month Treasury Rate Chart

3 Month Treasury Rate data by YCharts

The Dollar

What does the currency market think about yield rising here in the US? Judge for yourself.
^DXY Chart

^DXY data by YCharts


Doesn’t look like a currency market fearing the Fed either. There is a Dollar that melting down, like an ice cube on a stove. While the Euro is surging, something can’t please the ECB.

Inflation? What inflation? Gimme a break is what the market is telling the Fed, they don’t buy it, because there is no inflation.

Bond Markets Secret

You know what else the market knows, a German 2-year trades at -68 Bps, and a Japanese 10-Year trades at 0.06 bps, it knows there are gonna be plenty of buyers around to buy every single bond the Fed sells. That is if they sell them.

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