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Wednesday, May 4, 2016

Fed Squawks, Bonds Yawn

Chart: 10-Year Treasury Yield (BondEconomics.com)

Dennis Lockhart (President of the Atlanta Fed) said yesterday that a June rate hike was a "real option"; needless to say, the Treasury market rallied. Sooner or later, Fed policy makers will figure out that the bond market tends to ignore jawboning, and they will need to act to influence rates. (This article is extremely brief, as I have been distracted with other duties, including the final pass of work on Interest Rate Cycles.)

The bond market appears to be pricing a very sedate pace of rate hikes. If the Fed does follow the path of Ć¼bergradualism -- raising rates at every second meeting by 25 basis points, or 100 basis points a year -- the 10-year Treasury is essentially pricing an end of rate hikes within two years (assuming a small term premium), presumably the result of some form of economic slowdown. This is not entirely implausible, given the lacklustre nature of growth.

Since there is no sign of economic data being anything other than mediocre, it is highly possible that the Treasury market will remain mired in the trading range it has been stuck in for the past year.

(c) Brian Romanchuk 2016

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