After hitting a high of nearly 2.40% last week in the wake of the positive jobs report and central banks indicating that the QE era is nearly “done”, the 10 year T rallied this week to 2.30% today, now closing at 2.31%. Today’s testimony from Fed Chair Yellen encapsulates the dilemma of the worlds’ central banks. Nearly a decade of ultra accommodating monetary policy has resulted in very low growth and inflation (as compared to previous post WW2 expansions). The feeling is that this is “as good as it gets” and continuing present policies risk dangerously inflating assets across the board. Last month, the Fed indicated that recent low inflation data was transitory and that rate increases would proceed “on schedule”. Today, she indicated that the Fed is monitoring inflation and “stands ready” to alter policy. Also she mentioned that the “neutral rate” is lower than previously estimated (this is the rate at which the Fed is neither being accommodating or restrictive on growth). Bond markets rallied on this dovish sentiment. The Fed may be listening to comments from Chase CEO Jamie Dimon warning of potential market disruptions when they start trimming the balance sheet and selling bonds back into the private market. Bond market are also rallying on this week’s seemingly all consuming Russian controversy surrounding the Administration which casts doubt on any major fiscal policy being passed by Congress, further dampening inflation expectations. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners.
