Extraordinary Measures -> Yield Curve Control
Macro Perspectives
The U.S. 10-year yield traded as high as 4.88% last Friday - that was 58 basis points higher, relative to where market interest rates traded when the Fed entered its September meeting.
The Fed had telegraphed going one more time (one more quarter point) by the end of the year - they've since had tighter financial conditions delivered by the market.
We will get September inflation data on Thursday, which should continue to show inflation moving the Fed's way (lower). With the events in the Middle East over the past few days, the days of splitting hairs over a tenth-of-a-percent on a headline inflation number in the 3s (percent) are probably over.
As we discussed yesterday, the top should be in for yields, and indeed, yields traded down as much as 26 basis points from the highs of last Friday. That provides relief for stocks, which continue to bounce from the 200-day moving average (the green line) we've been watching.
That said, this move lower in yields is from safe-haven flows of global capital into Treasuries (prices up, yields down). Despite the many warts, the U.S. government bond market remains the safest, most liquid government bond market in the world.
As we discussed yesterday, the attack on Israel looks like a global war flashpoint which may derail some of the recent pushback on Capitol Hill, against the fiscal insanity.
In a wartime scenario, there would be no global government fiscal restraint - quite the opposite. The major global central banks may become more tolerant of inflation running above their target - and become more profligate (if possible) in their use of "extraordinary measures."
The latter (Fed extraordinary measures) would facilitate the former (more fiscal expansion).
How did the Fed do it in World War 2? Yield curve control. They financed war debt by pegging short term rates at a fixed rate, and by capping rates on longer term Treasuries.