Bubble-logic and the Fed’s “To Taper or Not to Taper”

One of the amusing things right now is that there isn’t much debate in equity-land as to whether to be long or not. The prevailing sentiment is you gotta stay the course until the fat lady sings, or at least clears her throat, in the form of the Fed saying it will really, finally, for sure, start the taper. And of course the Fed wants to have its cake and eat it too. The central bank, in the possession of overwhelming evidence that QE is not doing much for the real economy, very much would like to exit QE but without deflating asset prices. So it hopes that repeatedly insisting that it has absolutely no intent of raising interest rates any time soon will be sufficient to placate the Bond Gods and their drinking buddy, Mr. Market.

So for the most part, the talk among investors is various reading of fundamentals or technicals or historical parallels to justify staying invested in stocks. Now juxtaposed with that, you do find some bona fide skeptical commentary, such as Lombard Street note, 999 ()

Similarly, George Magnus, former chief economist of UBS who was widely recognized as an astute commentator in the runup to the crisis, gave a good overview in the Financial Times yesterday as to the logic for the bulls’ case: Key points:

The capitulation of market sceptics in the past several weeks has not been pretty. But it was perhaps inevitable, and so, as we look to 2014, the consensus among market strategists has hardened.

The Federal Reserve is expected to start tapering asset purchases in the first quarter of next year, if not sooner, but investors should keep the faith, and remain committed to the near five-year-old bull market in equities…

Looking back over the past year, almost three-quarters of the rise in global equity returns came from the re-rating of price-to-earnings ratios, which are now touching a long-run average (ex-technology bubble) of around 15, which is what they did in the 2009-10 rally, before trending down again until 2012.

The cheerleaders argue next year we will get upside earnings surprises, from an acceleration in global growth, higher capital spending by cash-rich large companies and rising operational leverage as margins increase. We could even get higher p/e ratios because the abnormalities of the 2008-13 period, including the financial crisis, recession, deleveraging and euro-break-up threat, are now history. Instead of the narrow 10-15 range for p/e ratios that describes most of the past six years, why not the more “normal” 12-25 range of the past quarter century?

For these things to happen, though, two propositions must hold. First, global growth has to accelerate, and become self-sustaining, and second, the “bad cycle” of 2008-13 must really be over, leaving no detritus behind. Neither stands up to scrutiny. The former is fickle, while the latter is fantasy.

Now with the central banks’ super cheap money, by design, driving investors into riskier assets, talk of fundamentals seems, well, antique. But behaviorally, something a smidge more complicate is going on.

Superficially, this is all typical late bull market/bubble behavior. Even if investors think valuations are strained and downside risks aren’t trivial, they are reluctant to leave the party early, since they get punished for lagging their comparable group. So as Keynes said, it’s better to be ruined in a conventional manner. Their incentives are that it’s actually better for them to stay in too long and get crushed in the rush for the exit, so long as they can succeed in getting no worse stomped on than their colleagues.

The second factor that leads them to risk overstaying was described by reader Scott. No investor can afford to admit to their clients that the Fed is dictating their strategy. They all have spiels generally of the form of how they do serious analysis of some sort to come up with their particular picks. They therefore need to craft a description of current conditions that makes them being long make sense given how they profess to invest.

I posit that in a lot of cases, they become victims of their own PR. Studies have found that lawyers who are defending a client they believe to be guilty increasing come to think their client might be or actually is innocent. Advocating his case leads them to come to believe his case.

But in the short term, unless we have an unexpected geopolitical event, Mr. Market does not seem to face any imminent threat to his health. Given how the Fed lost its nerve on starting the taper over the summer, I can’t imagine that the improvement in economic data, such as it is, is sufficient to give them the nerve to pull the trigger this week. If I were them, I’d wait to see how the critically important Christmas season panned out before making any decision. So most professional investors will be probably be able to ride out the end of the year without any holiday season high drama, except the sort generated by family dysfunction.

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45 comments

  1. Randomguy

    So who exactly owns all the toxic crap the Fed has purchased? Is it the taxpayers? Are we going to end up eating the trillions of dollars of crap the Fed has purchased?

    1. Yves Smith Post author

      The Fed has not bought “toxic crap”. It did make loans against “toxic crap” during the crisis, but the banks paid it back. The Fed has bought Treasuries and high quality MBS, meaning government guaranteed (Ginnies) or effectively guaranteed (Fannie and Freddie).

      However, it is sure to sustain interest rate related losses (as opposed to credit quality losses) since QE amounts to “buy high, sell lower”, assuming it sells, (as opposed to letting the bonds mature).

      Many people argue that the Fed’s paper losses (or even realized losses, if it were to become worried about inflation and have to sell some of its bonds to sop up liquidity) since the Fed can always monetize its losses, aka print. But former central banker Willem Buiter has argued that there are limits, if a central bank incurred big enough losses, it would not be able to monetize them without producing too much inflation (he said it in economist speak, so something more like “violate its price stability mandate”). In that case, the Fed would have to go to the Treasury for an explicit bailout.

      The MMT types have always said that the limit on Fed monetization is inflation, BTW, they have consistently acknowledged this issue.

      1. financial matters

        “”The MMT types have always said that the limit on Fed monetization is inflation””

        I’m not sure the MMT types are that worried about monetization per se. I think they tend to see it as fairly neutral. They definitely are concerned with inflation and exchange rates but I think more related to the extent that we can run federal budget deficits where money gets spent into the real economy. As the provider of the global reserve currency we are obligated to run current account deficits.

        I think they see the stock market and commodity bubbles in a somewhat different light. Since demand is down there isn’t the profit motive for productive investment so this money that could be spend there instead chases a limited amount of these other assets.

        I think the MBS purchases should be differentiated from Treasury purchases. I’m interested in the significance of the Fed trying to maintain money market rates especially if via triparty repo these money market funds end up invested in risky financial instruments/derivatives.

        Fed Moves Toward New Tool for Setting Rates
        ‘Reverse Repo’ Program Could Be Critical to Fending Off Inflation

      2. F. Beard

        since QE amounts to “buy high, sell lower” Yves Smith

        I.e. socialism for the rich – fascism. Ain’t “rugged individualism” grand, unless one isn’t rich? I don’t know what disgusts me more, central banking or those who think TINA. Otoh:

        And all the host of heaven will wear away, and the sky will be rolled up like a scroll; all their hosts will also wither away as a leaf withers from the vine, or as one withers from the fig tree. Isaiah 34:4

        So it looks like we’ll have reform anyway.

        1. susan the other

          Are those guys from Denmark also the ones explaining global warming by the cosmic particle explanation: that our atmosphere at night, when the sun does not counteract cosmic particles, absorbs enough particles to heat up our atmosphere? I think that’s how it went. You are right – it is good to have a cosmic view of things. That is, a completely opposite view to the free-market capitalism fairy tale. Too bad we are all locked in a time bubble in the here and now.

          1. F. Beard

            I don’t know. In any case the two topics are unrelated. The destruction of our entire Universe does trump global warming by quite a margin, I’d say.

            Just when do Progressives realize the need for God in this highly dangerous Universe?

            So, if God MUST exist (else we are doomed anyway) just what things might prompt Him to forestall The End? Fretting about CO2 or working for justice? And since fixing the money system should end the need for exponential growth what possible excuse is there for not doing so?

            1. craazyman

              “So, if God MUST exist (else we are doomed anyway) just what things might prompt Him to forestall The End?”

              This isn’t provable, but I would just venture a guess: maybe He discovered all the old Led Zepplin videos on Youtube and totally forgot about ending the world. That’s what’s happened to me lately. Amazing stuff.

              If the market shoots up 50% from here I won’t care, even though I’ve got a short position on (hedged of course). As long as there’s Youtube, it doesn’t matter anymore to me.

              In fact, my stove could be on fire with pizza burning in the oven and smoke all over the room and I probabbly wouldn’t break my attention until the end of the song. I’d just look up for a second and think “faaak, I’m not gonna let this distract me,” as I luxuriate in the impeccably beautiful cadence of every word by Mr. Plant. it could be like that with God.

              1. ambrit

                Dear c;
                But, but, hasn’t Plant gone a bit country lately? (And I don’t mean Flying Burrito Brothers, New Riders of the Purple Sage country either.)
                Me, I think I’m going to go short on common sense, and make a killing.

        1. Yves Smith Post author

          As I said, the MBS are all high quality = government guaranteed.

          They are not buying subprime. There has been virtually no subprime issuance since the crisis and the Fed’s aim is to support new lending, and government guaranteed mortgages have been 90% of the market, and just about 100% of bond issuance (the rest is jumbos that the banks are keeping on their balance sheets).

          1. Jim A

            “government guaranteed”…Isn’t that just another layer in the shell game? The real problem IMHO is just how ineffective the Fed buying spree has become. The risk isn’t inflation because for the most part that money doesn’t leave the financial system to bid up the prices of elements of the CPI. So it’s busy creating a new bubble (in equities and bonds) and patching the old one (real estate) But it is providing precious little “stimulus.”

          2. craazyboy

            There is “Maiden Lane” assets. I think that was lots of Bear Stearns bad stuff.

            But it’s small taters compared to their official balance sheet now.

      3. bob goodwin

        I am a little confused by the buiter quote. Isn’t he captured right now at Citi? Or is this a pre-Citi quote that may not apply?

        But in any rate there always seems to be an underestimation to what a government can do. The world demilitarized between the wars largely because economists claimed that a debt ridden world couldn’t afford another war.

        The argument about the Fed getting a bailout because of inflation also seems unlikely to me. Way too much has been covered up over the last 5 years to really believe that a ‘law’ would be followed if it were inconsistent with the ‘right’ thing to do. Printing is essential for asset prices. Asset prices will tumble immediately if QE is pulled. I learned this on NC. I may have learned badly, but it takes a lot of printing to get through this level of debt deflation, and we are not there yet. I think we know this because the labor numbers are fudged and the defudged numbers are not normal. So pulling QE too early will smash assets.

        On the other had pulling QE too late will cause inflation. But inflation will wipe out debt. So why will the fed follow the law? What examples do we have that anything in our financial markets is following the law? The law is a medieval relic.

        The very fact that fed says they are watching inflation is the reason I am skeptical.
        At least I get to keep the health insurance I like.

  2. vlade

    Yves,
    one comment I started hearning more and more is “tappering is not tightening”, which I suspect is what Fed loves to hear, as that would solve their how-to-exit-QE dilema (w/o admitting QE does little useful long-term).

    So investors (except in specific assets like RMBS that Fed was in effect providing a support for) are likely to ignore small taper (say decreasing the purchase amount by 10m).

    I believe that given the credibility problems Fed got in summer from getting cold feet, there will be either a taper this week (more or less symbolic, of up to 10m), or an annoucement of a specific date (something like “if the trend continues, we’ll start taper in Feb”).

    1. Yves Smith Post author

      There’s another reason for them to sit pat now, which I neglected to mention in the post: liquidity is always thin at year end, particularly in the bond markets. A lot of big investors try to close their books by the 15th. So any reaction would be amplified by the limited liquidity, and they are really concerned about perceptions.

      1. vlade

        I’d exect that the taper decision tomorrow would relate to January purchases, so would not affect EoY liquidity. In fact, the QE schedule for Dec is already pretty much

  3. Malmo

    Speaking of credibility, has the Fed said explicitly or even hinted implicitly through its variuos Fed governor conduits that they will definitely begin to taper this month? I believe I’ve read or heard they will revisit the taper question in earnest come spring and not before…and only if their pet indicators are in synch even though a few govs would love to have begun the taper five months ago. If they guide in their statement that March/April is D Day for the taper then that will effectively be the same as initiating tapering tomorrow and I’d imagine the market would throw a hissy fit in spades. With this in mind my guess is tomorrow’s language will be tame and vague, allowing more time for Fed talking heads to show a unified force to telegraph their intention before letting cat completely out of the bag during an upcoming FOMC session.

  4. Jim Haygood

    ‘No investor can afford to admit to their clients that the Fed is dictating their strategy.’

    Why not? I sure do. When the Fed’s easing, I extend bond maturities and increase equity allocations. And I’m happy to tell people why. In his 1980s book Winning on Wall Street, Martin Zweig coined the expression, ‘Don’t fight the Fed.’ It’s practically conventional wisdom these days, and a staple of investment adviser and hedge fund commentary.

    ‘[Global] price-to-earnings ratios are now touching a long-run average (ex-technology bubble) of around 15.’

    Meanwhile in the U.S., Robert Shiller’s P/E based on the past ten years of earnings has reached 25. That’s less than its 1929 peak of 32, and its all-time 1999 peak of 44. But it’s still well into the top decile of Shiller’s 132 years of data.

    However, as our esteemed colleague Dr. John Hussman has discovered repeatedly to his immense frustration, excessive valuation alone isn’t sufficient to stop a charging bull. Sequential bubbles are the only economic model the Federal Reserve has. These modern-day disciples of John Law will gladly inflate Bubble III (the one we’re in now) to the size of Bubble I (1999) or EVEN BIGGER if they can.

    The notion that there might be a price to pay when the Bubble III pops does not occur to the FOMC’s PhD morons, who fail to perceive that their elaborately rationalized bubble blowing is nothing but Soviet-style value subtraction.

    First, do no harm‘ is not a maxim that the FOMC’s economic charlatans have ever followed. Having thrown the kitchen sink at the wall and observed that it failed to stick, they are now igniting the furniture, defecating, and furiously winding their watches.

    1. craazyboy

      Except that that the market is completely ignoring what the impact of future discounted earnings should have on acceptable (meaning valuation based) PE ratios.

      i.e., a slow growth industry, like say, regulated utilities, may have a fair value of PE=10. (if they pay a substantial dividend) But MSFT during it’s fast growth days would be worth a PE of 30.

      If you were buying a whole company outright, perhaps the neighborhood kid’s lemonade stand that nets out $100/year, you wouldn’t pay $3000 for it because it would take 30 years to recoup your original investment – and then you are into making real money!

      All the historical data on stocks was in an environment averaging 4% annual GDP growth. PEs should be lower if the long term outlook is more like 2%, at best. Unless all companies can grow faster than GDP – which would be pretty weird. (achtung, consumer)

      But that would be fundamentals, and we don’t do that anymore.

    2. Yves Smith Post author

      Are you a professional fund manager who regularly has to talk to fund consultants as to why they should favor your over others in your asset class when they make recommendations to defined benefit plans?

      This piece is not about retail investor behavior but the big boys.

  5. slothrop

    “The Fed has bought Treasuries and high quality MBS, meaning government guaranteed (Ginnies) or effectively guaranteed (Fannie and Freddie).”

    High quality MBS. That’s pretty funny Yves.

    Buiter is exactly right. The Fed can and will go bankrupt. The 100-or-so bps run up in rates in 2013 cost the Fed almost $200 billion on an MTM basis. They’ve got about $60 billion left. When they start printing to cover their own losses the game is up. They have lost control of the bond market. This is what happens when you try to corner a market. Ask Bruno Iksil.

    The Fed’s assets are mostly long-dated UST it bought at the top of a bubble in bonds. How do you think this ends?

    And when rates rise Bubbles Kruggles is going to get all that inflation he’s being asking for.

    Tapering will roughly coincide with Basel III next month which when fully implemented and along with Dodd-Frank capital controls will bring this house of cards down in a controlled demolition if you will. Sound conspiratorial? Wait and see. There’s a reason there’s an RFID chip in the new $100 bill.

    1. Yves Smith Post author

      You are missing the point. They are high quality from a credit standpoint. There will not be any defaults or delinquencies on Treasuries or government guaranteed MBS.

      The losses are baked in from an interest rate standpoint. I said that. QE is explicitly a “buy low, sell higher”

      Their nominal equity is not their constraint. That does not matter for a central bank. They can monetize their losses until they start creating inflation. You are watching the wrong metric. And they don’t even have to sell unless they need to sop up liquidity. They can just hold to maturity. So until Fed fund rates exceed their portfolio yield, they don’t even have any stress in doing what they are doing.

      I think QE is a terrible policy, but the Fed has a hell of a lot more runway than you think it has. It will have to stop due to the bad side effects, not balance sheet constraints.

  6. Jim Haygood

    ‘How do you think this ends?’

    With Enron-style accounting to hide the losses, as the Federal Reserve has already proposed in the infamous Carpenter et al paper of January 2013:

    Federal Reserve Bank accounting rules stipulate that when income is not sufficient to cover expenses, remittances to the Treasury cease, and the Federal Reserve books a “deferred asset.”

    Phony accounting to paper over phony money creation: with their legal impunity, the FOMC can fashion the optimal cover-up to disguise their crime.

    1. Dan Kervick

      The Fed has no real reason to hide losses. In fact, if people understood the function of a central bank better, they would be asking why the Fed is generating positive “earnings” for itself at all. A central bank, unlike a privately owned commercial bank, doesn’t need to generate a net inflow of income in the currency that it, itself manufactures and manages. Positive central bank earnings are effectively just another form of taxation. Given the stagnant condition of the US economy, there is even less reason than ever for high positive Fed earnings. There is certainly no overheating that has to be tamped down.

      It’s amazing that will all the ballyhoo about QE and the supposed wild monetary expansion it connotes, people never seem to realize that Fed earnings have been going up during the period of QE – which means it has been conducting a contractionary monetary policy during this period.

      The Fed issues dollars and uses them to buy high quality MBSs which has lead to more old dollars being sucked out of the private sector than new dollars being injected into the private sector. All that money we’re paying monthly on our mortgages? Since QE, a lot more of it is going to the Fed now.

      What is it doing with that money? Handing it over to the treasury. But is the US government expanding its own spending to stimulate the economy and offset the QE tax. Nope. It has been reducing spending and using the Fed earnings to pay down the debt. So QE has functioned primarily as an appendage to the federal tax system and the government’s misguided obsession with deficit and debt reduction.

      The reason the Fed books negative income as a “deferred asset” is because the entire shortfall is covered by reduced remittances to the treasury in the future.

      1. susan the other

        So it is deflationary. Is it now impossible for inflation to emerge? Until debt is absorbed? Maybe a decade down the road? And the stock market is just more of the same – without inflation in the general economy all the stocks are headed up without the earnings to back the stock price, causing a dilution of value? And it explains why Bernanke wants to just let the MBS “run off.”

      2. TimR

        “All that money we’re paying monthly on our mortgages? Since QE, a lot more of it is going to the Fed now.”

        You mean, those MBSs the Fed bought, are sucking up money from the private sector, onto the Fed’s profit ledger?

        And then they remit it to the Treasury… so, some mortgage payments (via the Fed) are just going to the government / Treasury, and being applied to the debt, like a tax payment…

        (I just repeat it to make sure I’m following, and because it’s strange and fascinating…)

        1. Dan Kervick

          Yes. They can be structured with different degrees of complexity and layers of derivativization, but basically a mortgage backed security is just a security whose cash flow is derived from bundles of mortgage payments. Part of QE involves the Fed buying these securities from the private sector, after which point the cash flow goes to the Fed, not to whomever previously owned the security. The previous owner gets cash in hand from the Fed, and in exchange they have forgone the future earnings from the security. Since those cash flows then contribute to the Fed’s net earnings, much of the cash flow ends up going to the US Treasury. The Fed is not allowed to simply issue dollars and deposit them in the Treasury. But what they can do instead is issue dollars, buy securities and then deliver the profits from the purchases to the Treasury. It’s one of the many stupid workarounds the government has to do to deal with the archaic early-20th century monetary system we have, and also to conform with global financial capitalism’s insistence that central banks should be “independent”. The capitalists want central banks to have the freedom to shut the rest of the government off if they don’t like how it is conducting fiscal policy.

          I think this is one reason Bernanke expressed persistent frustration with the government’s fiscal policies. He was delivering tens of billions to the Treasury every year that it could have used to expand spending. But instead Washington was focused on “fixing the debt”.

          1. GRP

            The Fed is not forcing anyone to sell the MBSs or Treasuries they are holding. Moreover they are paying interest on the reserves they are holding. Since these assets the Fed is purchasing are as secure as the reserves, the only reasons someone would sell the assets to the Fed is that they are in need of liquidity or that the reserves themselves would earn a higher rate of income than the assets. Since the banks are awash with liquidity in the form of reserves, the rate offered by the Fed for the assets must be such that the income from reserves is higher than the income from the asset. So, far from draining income from the private sector, the Fed is actually increasing the income of the private sector, while simultaneously providing liquidity. True, this is also providing more income to the government, but not at the cost of income to the private sector, but in addition to it.

            1. Matt Franko

              What about the differential between the IOR rate and the IR on mortgages? iow Fed pays <0.25% IOR while the MBS yield dunno 4-5%? Fed makes this IR spread and forwards the "profit" to the UST….

              Also, it is a 'Dealer Market' for the MBS and USTs, ie not an "open market"… rsp,

          2. Matt Franko

            Dan,

            “Bernanke expressed persistent frustration with the government’s fiscal policies.”

            I’ve never seen or heard him do that Dan, to the contrary I’ll I recall is him scolding Congress to get their fiscal policy back on track for long term sustainability/get their long term fiscal house in order, etc…

            He’s a big part of the problem, and J Yellen may not be much better… I guess we’ll see… rsp,

            1. GRP

              Are these assets trading at par? Anyway, why would a holder of one of these assets sell them to the Fed if the yield on the cash/reserves is less than the yield on the asset, the asset is just as secure as cash/reserves and the asset holder has no need for liquidity? Is there any law requiring holders of assets to sell them to the Fed at a price specified by the Fed when the Fed is willing to purchase them?

  7. Chauncey Gardiner

    Heh, got a huge kick out of your last sentence, Yves, even though I’m far from a professional investor. Not looking forward to that dinner with the attendant servings of prepared, albeit reheated and tasteless ideological talking points. Btw, a friend of mine says all families are dysfunctional. I’m beginning to come around to that viewpoint.

    Thank you for an insightful article. Thought much the same thing when Hugh Henrey, a prominent formerly bearish macro hedge fund manager, capitulated back in late November. He cited the primary trend as his sole raison d’etre. Yep! “Party like it’s 1999.”

  8. Jackrabbit

    If I were thoroughly cynical, I would say that Yellen is to be the fall guy. I suspect she may try to right the ship and in the process be blamed for the hangover. Summers will be anointed appointed to replace her.

  9. Min

    ” No investor can afford to admit to their clients that the Fed is dictating their strategy.”

    “Don’t fight the Fed.” — Martin Zweig (who called the 1987 crash).

  10. GRP

    Why would the Fed taper? If the purpose of QE had been to provide liquidity to the banks it was achieved long ago and QE should have ended. If the purpose is to provide low interest debt to the US government, the MBS component should have been ended and only treasury purchases continued. If the purpose is to increase the core inflation rate or bank lending to the private sector by infusing excess liquidity, it hasn’t worked and doesn’t seem to have the possibility to.

    About the only logical purpose that the QE is serving is blowing the asset bubble and holding it up. Knowing that ending the QE or reducing the quantum will cause a sharp reversal, the Fed has no reason to do so. If anything, they might actually increase the quantum of the QE. If the bubble is going to burst, let it, but don’t see the Fed wanting to be held responsible for pricking it.

  11. Christer Kamb

    It is not difficult to understand how the FED can earn money(interest) buying bonds with newly printed cash and just pick up the coupons. The problems arise in the “future” when bond-vigilantes(i.e. pensions-funds) are forced to sell bonds(yield-seeking)en masse in exchange for stocks and other private paper. When capital flows out of the government bondmarket driving interest-rates much higher is the FED then willing to rescue the Treasury and can they? Will they force banks to buy bonds and continue to monetize when Mr Market departs?

    1. GRP

      The “bond vigilantes” don’t have the power of the Fed. If they start getting out of government bonds and yields start rising, the Fed only needs to increase the quantum of QE to bring the bond yields down. There is no theoretical or even practical limit on the volume of government debt the Fed can purchase in the open market. The “bond vigilantes” are limited by the amount of reserves to purchase government bonds; the Fed has no such limitations since it creates the reserves. The Fed can purchase all the outstanding US government debt that is on offer for sale, if it chooses to. When there are no bonds whose yield to drive up, what will the “bond vigilantes” do?

  12. Bruce

    Obviously it is not the case, such as for 30 y T-bonds, that the interest on the bond is less than the interest offered for reserves. Why might the bank still sell the bond, even though it does not need the liquidity? If the bank thought it could buy a bond later which offered a higher coupon than the one sold, then it would make a net gain on the two transactions receive a higher stream of interest sometime in the future. If as Yves says, the FED “buys high, sells lower”, then this is an attractive speculative bet for the bank. It seems to me the FED has to signal to the banks that these trades will pay off. Should the banks conclude they are being played, then they will not sell the bonds to the FED.

  13. Christer Kamb

    @GRP, Well in theory that is true. But if “bond-vigilantes” represents a very, very BIG slice of all bond-owners all over the world and if they all decides that yields are to low at a time when they can see stockmarkets continuing to roar to the upside(negative rates i.e.)but even faster. Wouldn´t that impose some big hesitation at the FED? If growth returns and maybe it will return to the USA first. Wouldn´t that imply big capitalflows into the US. Much stronger dollar and higher rates as a natural move! Bondowners don´t sell their bonds because of fear of higher rates but because of too low rates. What if inflation returns later but initially as cost-push inflation? Not demand-driven positive inflation? Stagflation? I can see a lot of big if´s for the FED to reject monetizing en masse! “Bondvigilantes” of today would be almost everyone. And therefore it can be possible to experience a big rate-move without FED interfering in a big way.

    1. GRP

      As it happened, the Fed announced a taper from US$ 85 billion a month to US$ 75 billion a month and the stock markets soared. US Treasuries have seen no change in yields. But it may be too early to say that they will hold.

      My point was that the Fed has the capability to buy all the US treasury debt that is on offer, should it decide to target a specific yield rate for treasuries. But I do not think they are doing that. So they may allow the “bond vigilantes” to influence the treasury yields. The “bond-vigilantes” have only that power, to determine treasury yields, as the Fed allows them to have.

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