One of the contributing factors to the heady gyrations is the Fed not sufficiently addressing the issue of the US Treasury needing to draw down its account at the Fed from the current $1.6+ trillion to $120 billion, which creates all manner of havoc at the shortest end of the curve as banks and others in the financial system run out of places to park this money in “risk free” assets like t-bills,
Something was a bit of loud statement at the time from the Powell Fed that the market did not pick up on was his observation this week at testimony before Congress that all of the rise in treasury yields of late was merely a reflection of rising optimism for the economic outlook. What about the scary levels of treasury issuance?
The additional damage may not need be significant if the Fed first: moves both makes the technical moves need to avoid further system risk linked to the US treasury’s monumental shift of liquidity, but also second: provide some obvious hint that it will only allow yields to go so high before stepping in with yield curve control There is the irony and the chicken and egg question – the Fed may first need some more damage before it has the coverage to do something as drastic as yield curve control. So if the first move is merely the technical one on money markets to deal with liquidity issues and no hint at yield-curve-control, we could get dragged through the mud of a bigger traditional risk off move here for a while. Let’s make no mistake: yield curve control is a must, or the Fed will have no chance of seeing its inflation and employment targets met. In the beginning, we may only see this in baby steps, like a promise to cap two- or three year yields (the latter like Australia’s RBA). That would likely be enough for a while, even if the Fed would like have to shift to five years and longer if rising yields persist and this continues to plague risk appetite.
This reversal in EURUSD is an ugly one for the bulls, coming as it did just after the pair had spiked through a major resistance level just below 1.2200. A weak close would point to a test of the 1.2000 and possibly the even more important existential level for the uptrend at 1.1900. Already with this latest burst higher in yields spreading to Europe earlier this week, we saw ECB President Lagarde out declaring that that the central bank is vigilant on the need to watch yields.