As Treasury Yields Fall, Ask Yourself: How Long Are They Going To Let This Go On?

This seems like a good time to remind you that not everyone is buying the notion that the Fed is happy with the market’s reaction to last week’s rate hike.

Remember, for all intents and purposes, the “hike” was a “cut”- if we’re going by financial conditions that is. Recall the following from Goldman:

The FOMC delivered the expected 25bp hike, with only minor changes to its projections. Surprisingly, however, financial markets took the meeting as a large dovish surprise—the third-largest at an FOMC meeting since 2000 outside the financial crisis, based on the co-movement of different asset prices. Our FCI also eased sharply, by the equivalent of almost one full cut in the federal funds rate.

GSHike

Well if Goldman is right to say that this was “almost certainly not” what the Fed wanted, well then you’ve got to think we’re going to be in for a renewed push in terms of hawkish jawboning.

The Friday before Trump’s speech to Congress, 10Y yields hit YTD lows. Stocks looked wobbly as the reflation narrative appeared to be increasingly vulnerable. Remember what happened just days later? NY Fed chief Bill Dudley and San Francisco Prez John Williams jawboned yields back up. Then, in case there were lingering questions, Lael Brainard jumped on the hawkish bandwagon – once Brainard converts, you know something is afoot.

Well, have a look at the following chart. If Goldman and all those who are buying the whole “the Fed didn’t mean for this to happen” meme are right, you’ve gotta ask yourself how long this is going to be allowed to go on:

Treasurys

And while the 10Y short was notably trimmed according to the latest CFTC data, there’s still a lot of work to do in terms of short covering (especially in the belly) assuming yields continue to fall. Needless to say, that could exacerbate the rally.

Don’t think the Fed isn’t acutely aware of that. After all, having squeezed in a hike…

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