Wednesday, February 19, 2014

Bond Market Doesn't Realize Taper is Bullish


"Bond yields just shot higher upon the release of the latest Fed policy committee meeting minutes, which showed significant support within the Fed to cut its bond-buying program. The ten-year note is now down 7/32 in price on the day to lift its yield to an intraday high 2.736%, per Tradeweb data."
If the Fed is really going to buy fewer bonds, then I can confidently go out and buy them. The conventional Bill Gross wisdom on this is totally wrong.

People think that the flow of the Fed's purchases maintains the bond price. A better theory is that this flow is small in relation to the total stock of fixed income securities, and the concern about inflation and real yields causes interest rates to be higher than they would otherwise be.


Nathan said...

Agreed. The conventional wisdom is especially perplexing because it's been wrong twice now.

Equally strange is the similarly popular view that the taper will be worse for bonds than stocks, despite the last two experiences.

CP said...

Great charts.

I wonder if we can get down to 1% on the 10y in this bout of deflation?

Joe Nelson said...

1% 10 year?

How about a 1% 30 year bond?

Crazy? Probably, but I wouldn't rule it out if the Fed stops paying interest on excess reserves.

CP said...

Yep, I've said the yield curve would probably be 1% out to 30 years if we had sound money.