John Mauldin examines the Fed statement and wonders if they really said what the markets seemed to hear. Was it any different this time??
Thursday saw a powerful response by the markets in stocks, bonds, commodities, and currencies to the communiqué from the Fed after its recent two-day meetings. Clearly, some were interpreting the communiqué to mean that the Fed had finally come to an end of its interest-rate-hiking ways. The immediate spin was quite “dovish” in terms of future rate hikes and concern about inflation.
That has become a pattern in the last year. The Fed releases its minutes, the immediate spin is that we are ready for a “pause,” and the market rallies. Then we start to listen to the speeches from Bernanke and various Fed governors and are shocked - shocked, I tell you - that nothing has really changed and they intend to keep on raising rates in a measured manner.
And there seems to be little explanation for the 3-month T-Bill remaining anchored below the Fed funds rate:
This afternoon I had a conversation with bond maven Jim Bianco. I called him to ask a question that has been perplexing me. Why haven’t 90-day rates moved up with the Fed funds? Fed funds are at 5.25%. The 3-month T-bill is at 4.98%. The rest of the yield curve is acting normal for an inverted yield curve, but the current 3-month action is strange from a historical perspective. If you can get 5.24% for a 6-month bill, then you should take the 6-month over the 3-month.
As it turns out, there is no good reason for the anomaly, or at least not one that he knows of. And if anyone should know, it would be Jim. He thinks the likely explanation is that there is so much “flight to quality” that it is simply depressing the 3-month yield, as people who are looking for safety are not overly worried about yield. That makes some sense, but it is playing games with the yield curve.
