Pro Perspectives 6/21/21

June 21, 2021

With asset prices booming, and a Fed that has continued to feed the fire, there have been many that have feared a repeat of the 2013 “taper tantrum.”

Let’s take a look at that analogue …

In 2013, just a few months into QE3, the Fed began setting the table for reducing the size of its emergency bond buying program, and telegraphing an exit strategy. 

What happened?  Rates went crazy. 

In four months, the 10-year Treasury traded from 1.6% up to 3%.   In June of 2013, mortgage rates jumped a half a percentage point in a week (the biggest one week move since 1987).  That shook a very, very fragile housing market.  And it shook the fragile stock market.  Stocks first had an 8% drawdown, and then a 5% drawdown, all within those four months.  

Lesson learned. Fast forward to last week …

The Fed came clean and acknowledged what everyone already knows — the economy is booming, and inflation is hot.  And with that, they started the very subtle process of shaping market expectations, by planting the seed that the liquidity deluge (that is their bond buying program) will indeed be wound down, if the recovery continues on this trajectory.  That’s common sense.  But markets need to hear the Fed admit it, which they did. 

So, will rates go crazy, and scream to 3%, as they did in 2013?  Not likely.  In fact, today the 10-year yield traded to the lowest level since February (back down, as low as 1.35%).  

Why this market reaction?  As I’ve said before, from the lessons learned observing the past thirteen years of central bank intervention, we don’t have to wonder if/when the Fed might respond to a destabilizing force.  We know they are on red alert and will do anything/everything to maintain confidence and stability. 

With that, we have a Fed that already controls the Treasury market — explicitly.  That’s why rates have traded down, not up since the Fed meeting.  We should expect them to keep rates pegged precisely where they think confidence and stability is maintained.  This will continue to promote the asset price boom.  And with that, as we discussed on Thursday, this continues to be a “buy everything” market.