Just moments ago, we brought you Deutsche Bank’s take on the “mania” we are supposedly mired in. If the Fed raises short-term rates, keep the long-end anchored, and everything will be fine, right? We guess. We hope. Because other wise, a September hike will be a bloodbath.
Here’s Bloomberg’s take on where we’re headed:
“Fed officials appear determined to give themselves room to raise rates, fighting back against a yield curve that threatens to limit what the bank can do. It’s narrowed as expectations for growth and inflation have fallen. The trend could tie Janet Yellen’s hands.
Slimmer spreads increase the threat that the Fed will cause short-term yields to climb over those in the long-term. Officials don’t want that as seven of the last eight inverted curves have presaged a recession.”
“The gap between two- and 10-year yields typically narrows when monetary policy tightens. It’s narrowed to 87 basis points (falling as low as 75) from 122 as the Fed has retreated from plans to increase rates four times as global turmoil and poor data undermined their plans. Boston Fed President Eric Rosengren forcefully argued against waiting to raise rates. Governor Lael Brainard, a member of Janet Yellen’s inner circle, suddenly added a Sept. 12 appearance to the calendar and could bolster that case. Officials have been recognizing the economy may not grow quickly enough to return the terminal rate to former levels. The Fed has gradually lowered its forecast to 3% from 4% in 2014. Many investors see even that as too high. The market is also dubious about the risk of inflation getting off its back and becoming runaway. Inflation-indexed Treasuries forecast consumer prices will rise an average 1.33% in the next five years. Fed funds futures show a 32% probability of a September rate increase and 62% by year-end. A second increase isn’t priced in until October 2018.
Even with the BOJ and ECB easing to fight deflation, it’s hard to see this as a positive backdrop.”
Oh, ok. So you want to blow out the long end? You want to bear steepen? Really? We would suggest that’s a horrible idea.
Because do you know what happens next? JGB and bund yield blow out. And. You. Do. Not. Want. That.