March employment data were just as strong as expected, consistent with a briskly expanding economy, and long-term interest rates moved up in anticipation of more hikes from the Federal Reserve. The 10-year T-note is up to 4.96 percent, and low-fee 6.5 percent mortgages are fading in the rearview mirror.
The slowdown in housing, widely expected to slow the overall economy, has yet to show the slightest sign of doing so. The burden of proof is now on the theorists.
During the first 18 months of Fed tightening from 1 percent to 4.25 percent, long bond yields remained stationary at 4.5 percent or below. In January, bonds changed behavior, rising in yield just before each of the last two Fed meetings to the level of the next .25 percent hike. The pattern has changed again. The Fed went to 4.75 percent last week, and bonds immediately began to move to the 5 percent, to which the Fed is expected to go on May 10.
Having done so, bonds now in the habit of jumping the Fed gun, and in knowledge that 5.25 percent at the Fed’s June 29 meeting is highly likely, will bonds sit around here at 5 percent (with mortgage rates approaching 6.75 percent), or keep right on going up?
The low-volatility bond market since 2002 has been unnatural, and the product of the Fed. Post-bubble, the Fed set out to prevent the advent of deflation; it would not only hold the cost of money at a 50-year low, but would also try to hold down long-term rates. Having no machinery to suppress long-term rates, it deployed its trusty jawbone: former chairman Alan Greenspan saying the Fed would stay easy for “an extended period.”
The Fed got what it wanted, and then some. When Greenspan began to raise the cost of money in 2004, no one was more surprised than he that long-term rates did not begin to move up also. Eight months later, in evident frustration (when the Fed removes “accommodation,” it wants to remove all accommodation), the Maestro described the predicament as a “conundrum.”
Everybody has offered answers to the riddle (Professor Ben Bernanke two weeks ago offered about a dozen, and then wholly or partially demolished them all), and here is one more: The Fed told the bond market that it wanted yields to stay put, and they did; it has taken 15 quarter-point kicks in the butt to get long-term rates moving again. I suspect that now moving, they will resume normal behavior, rising to produce a positive spread versus the Fed, and trade in normal, chaotic volatility. If this long-rate rise continues, the Fed will stop quickly.
Enough of ominous notes on bonds. This week brought entertainment, too.
On Wednesday, the bond market briefly crashed when Treasury Secretary Snow said today’s job numbers would be “very good.” Insiders are never, ever supposed to hint in advance of crucial data releases. However, the market quickly recovered.
Every sensible person trying to analyze bonds and the Fed thinks from time to time that we can’t possibly have enough information, that the Fed must have insights that we can’t imagine, let alone understand, and then… then…. The Fed this week released verbatim transcripts of its meetings in 2000. That fall, Greenspan and the Fed’s research director in painfully clueless language dismissed any prospect of weakness in technology, or the stock market, or the economy. Wow.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at firstname.lastname@example.org.