March 30. The Fed wants to let the air out of equity prices; bonds understand that

–Yesterday Rosengren said that gradual rates hikes won’t jeopardize progress, and that the economy is strong enough to withstand four hikes per year.  Williams said the economy will grow at a ‘healthy’ pace amid hikes (even though his own growth forecast according to his speech is about 1.6% longer term, with 1% productivity growth. “Combining that near 1 pct figure with labor force growth of 0.5 pct yields my trend growth estimate of 1.6 pct.”  So these Fed guys are front and center saying the economy easily absorbs hikes, but the 5/30 chart below is saying “I’m not so sure.”  This 105 level where 5/30 currently sits is pretty much the low over the last decade, and it’s poised to visit double digits on the next hike, or perhaps even the next hint of hikes…and that’s where Mester and Kaplan come in today.  I sort of think of a positive yield curve as a lubricant for a profitably functioning financial sector.  We’re getting back into conundrum territory, where the Fed raises short term rates, but the long end sits.  And perhaps that’s the reason that June bond vol is mired at 9%… because the 30 yr bond yield is anchored to 3%.   Note that 2/10 notched a marginal new low at 111.

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  Former member of the CME specializing in interest rate options and yield curve strategies.

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