Wednesday's Market Minute: If/Then

If the Fed says absolutely nothing new, then bond yields should continue to climb. Why: because yields have already been climbing under the new regime; objects in motion tend to stay that way. If bond yields spike immediately, CFTC data and recent TLT put volumes suggest active traders may have a short position to cover, which means an immediate move higher may be limited. If yields do drop, there is probably imminent support at 1.5% and 1.4%.

If bond bulls really start raging for whatever reason, the 10-year yield could fall all the way back to 1.1% and still be in an uptrend from August that puts it on track to hit 2% by year-end. If bears do stay in control though, and 1.6% turns out to be support for the yield, get ready to rip: support in 4Q19 at 1.7% could become resistance today, but from there, there isn’t much in the way of 1.9%. Why: because that’s where the ascending triangle from 4Q19’s failed breakout in yields turned southward. If we get to 1.9%, why not go for the grail and just close the Aug. ’19 gap down from 2%?

If the mindset of traders is still focused on recovery and reflation, and the Fed isn’t going to get in the way of things heating up, then a quick trip to 2% doesn’t seem unreasonable. If yields do keep climbing without any change in messaging from the Fed, it gives more support to the notion that yields will be unstoppable barring a shock slowdown in the recovery or new incremental bond-buying by the Fed (Operation Twist, Yield Curve Control, etc). If the Fed starts talking about that stuff already, then we can probably conclude something is wrong. Why: as Ray Dalio writes this week, “increasing bond buying when the markets and economy are strong… would signal supply/demand problems.”

If the Fed does talk twist or bond-buying of any kind, then stocks and bitcoin probably love it. If the Fed doesn’t talk about twist or YCC, it shouldn’t be a surprise, because they’ve given no indication any such action is coming. If the Fed does imply sooner hikes than in their previous messaging, then the market is in for a real test. If yields drop as the Fed warms up to hikes, then it suggests the market is genuinely concerned about runaway inflation and the Powell’s willingness to combat it might be viewed as comforting. If that happens, stocks probably drop. If the Fed’s language on future hikes gets hawkish and bond yields keep climbing, then it suggests the market is seriously worried over the possibility of inflation and everyone should buckle up for some craziness. If the Fed tinkers with mechanical things like interest on excess reserves or banks’ SLR rule, gyrations are likely to be short-lived within the broader context of the bond market’s trend since August.

Photo by Katie Moum on Unsplash