Grand Fed Railroad

What happened to runaway interest rates? Pundits would have us believe that the smattering of relatively-positive economic data which have been released during the past few weeks were signs that Soft Patch 2012 (it seems like an annual event) was over and they economy was accelerating to escape velocity. Oh please, one cannot fly to the stars while tethered to a rock. That rock is fiscal policies, both domestic and foreign. The release of the Fed minutes indicate that, unless economic data exhibits sustained improvement, the Fed would act by injecting more stimulus into the economy. One would think that long-term rates might jump on the news that the Fed is poised to inject more stimulus, but the reasons for the need for more stimulus stated in the minutes (high joblessness, a faltering global economy, etc.)rattled the markets. It appears as though market participants were looking for hopeful comments from the Fed. Few were to be found. We have previously written that the past several weeks were not indicative of broader market sentiment and that many market participants were smoking "hopium." Market trends of the past three sessions seem to bear us out. We foresee a situation in which European and Asian economic concerns renew the capital flight into U.S. Treasuries. While we are not bold enough to call a bottom on the 10-year yield, we would not be surprised to see its yield in the neighborhood of 1.50% post Labor Day. The caveat is the Fed meeting in Jackson Hole, WY. If the Fed hints at more QE at next week's conference, we could see some upward pressure on long-term rates. The 10-year could approach 2.00% as the September FOMC meeting draws near, As with the two previous rounds of QE, the yield spike will probably be short-lived (and less dramatic this time around. As with a substance abuser, the economy builds up a tolerance to stimulus injections. The high is less each time. With the economy showing more railroad tracks than an East Village junkie, we do not put much hope in the stimulative effects of another round of QE. As we have previously stated, long-term rates will eventually be much higher, but not now. Also, rates could peak at lower levels during the next interest rate cycle than to what we have become accustomed. For now, it is on to Jackson Hole. Tom Byrne tom@bond-squad.com. www.bond-squad.com www.mksense.blogspot.com 347-927-7823 Twitter: @Bond_Squad Disclaimer: The opinions expressed in this publication are those of the author. They are not, nor should they be considered solicitations to purchase or sell securities.