Requiem For The Bond Vigilantes

Oooops!

Interest rates spiked this morning with the 10-year benchmark UST leaping back above 4.0%, causing stocks and other risk assets to head for the hills. That lurch resulted from some noisy jobs data, which implied that the Fed is by no means done with its interest normalization campaign. The vaunted “Pivot” was accordingly shoved even further into the distant future (i.e. 2024).

Two-Year to 30-Year UST Yields

The question recurs, therefore, as to whether the Fed should be in the interest-pegging business at all. Here is the inflation-adjusted Fed funds rate for the past four decades and it betrays no economic rhyme or reason. It’s just the handiwork of central bankers sliding by the seat of their pants with no idea of where they are going or why.

After all, what possible economic condition could have justified 176 months of negative real Fed funds rates out of the last 183 months since February 2008?

That’s right. The market signal 96% of the time since the eve of the Great Financial Crisis (GFC) is that carry trades are free and that the best and highest use of capital is in pursuit of leveraged speculation.  And that’s exactly what the Fed got, of course.