Never have bond yields had a more important role in determining the fate of the global financial system than now. The ECB announced this week that they are increasing their bond purchases. Europe already has negative interest rates and their debt picture is the worst on the planet. Every Euro-zone country’s debt is connected to each other. A chain is only as strong as its weakest link. If one country implodes the rest will follow. We live in a global economy today where everything is connected and every action has a reaction. If the US were to allow its yields to rise, it would send capital fleeing from the European markets causing systemic damage. Additionally, a serious spike in yields for the US would inflict hyper inflation, real estate bankruptcies, loan defaults, and potentially cause US debt default. The Fed has learned over the years that as the US debt load has increases, they must continuously change the rules in order to combat it. It is unlikely we will see just yet what occurred back in 1980 with interest rates over 10%-17%. As each year passes, the amount of Fed intervention in the markets has increased in direct correlation to our debt load. In order to keep their fiat system of money in place and extend their control of the financial system, they need increased intervention and manipulation. If the Fed let markets work naturally, we would have had a major crash back in 2008 with far more damage and volatility, but that is the nature of the boom bust business cycle. The Fed’s greatest fear is a major crash followed by civil unrest that might result in an end to the Fed.
Yields will be the focus of the Fed meeting this week. The Fed wants modest price inflation to get us out of the hole we are in from the lockdown of the global economy. Rates are climbing too high too fast and are currently a problem. The Fed has two possible paths: First, an ‘Operation Twist,’ which they have done in the past, where they will sell more short term T-bills to America and raise cash, and at the same time they will buy longer dated treasury bonds 10 year+. The net result is a slight bump in overnight interest rates and a decline of longer term rates – yield curve control. The second option the Fed will have is to expand its Repo operations (overnight lending to institutions) to a greater number of dealers/institutions. At the same time it would raise rates on the Repo money it lends overnight. It would raise rates on reserves that Fed banks keep. This would attack the front end of the yield curve helping ease the benchmark 10-year bond rates lower. The last thing the Fed wants to is upset the stock market inflation trade. As the economy improves its footing from the Covid recovery, look for the Fed to allow rates to climb and the market to absorb that rise. However, that is unlikely to occur in 2021. Look for volatile trading the next 7 trading days into March 23rd. If all goes well, this will be a buy-the-dip opportunity in stocks.
Sentiment is showing the 10-year bond is due for a bounce which should suppress interest rates. March 17th, Wednesday 2:00pm EST our questions will be answered by the Fed.
