Upside-Down?

Picture Credit: National Library of Ireland on The Commons || Interest rates always move in lockstep, right?

So the Fed loosened 0.50%. Long past the time it should have done so. What was the result on the long end of the Treasury yield curve?

Well, look at that! As the Fed cut the short-term policy rate, yields in the portion of the yield that matter more rose. And as an example, yields on 30-year MBS (mortgage backed securities) rose by 0.04% in yield. 15-year MBS rose by 0.02%. All of the yield curve rose from 1 year our to 30 years.

50 basis points of loosening was an upward surprise, so I take the steepening move in the yield curve as an expression that the market expects fewer cuts in the future, perhaps due to rising inflation, or just an unwillingness to lend more without additional compensation. I mean you two horrendously lousy presidential candidates making extreme promises to make the deficit even bigger. The GDP of the US grew faster when we ran balanced budgets — admittedly long ago. But fools think national credit is unlimited, and the grand enabler of that fantasy is the Federal Reserve.

Now, this just a day. Let ‘s watch what happens. The steepening could reverse, and even more so. But if this persists and goes further, you could see the Fed questioning whether they want to loosen more. Remember, the Fed is a slave to the bond market, not vice-versa.

Anyway, watch the slope of the yield curve. It tells you more about what is going on than the yammering of the Fed.

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