Central Banks in Focus in Bond Yield Rise, Fed Minutes Indicate Internal Divisions

The 10 year Treasury has risen about 20 basis points in the last week as markets are parsing recent remarks by the ECB, Bank of England, and our Fed.   A consensus is emerging that the extraordinary quantitative easing measures over the past 9 years are coming to an end or a “tapering”.    Interestingly, this development is occurring before inflation has picked up (above the stated 2.0% Fed target).   Why?  As today’s Fed minutes indicated, the Fed believes that recent tightening in the labor market will result in wage inflation down the road.   Also the Fed mentioned that some “transitory” factors such as cell phone bill discounts and drug prices are temporarily holding inflation back.   We’ve heard this before, it could be a case of the Fed making the data match their course of action (raising rates in the absence of inflation).   Central bankers are also concerned as worldwide debt hits all time records.    US Treasury yields are also rising as European yields jumped at their highest weekly level since 2015.   Our treasuries were a “value play” even at 2.00% when German yields were near zero.   However, the US Treasury yield actually dropped today as the Fed minutes revealed divisions as to the speed and frequency of future rate hikes. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners.