RISING LONG-TERM YIELDS ARE A NEW,
BUT LIKELY A TEMPORARY CONCERN There are worries that rising long-term interest rates globally will halt the bull market in stock index futures. My belief is that rising long-term yields will be met with yield curve control measures by the major central banks. In fact, the Reserve Bank Australia was the first to address this issue by recently doubling down on bond purchases. The RBA announced plans to buy more than $3 billion of longer-dated securities, following up on a surprise boost in purchases of shorter-maturity debt. Also, several European Central Bank policymakers suggested the central bank stands ready to provide more stimulus if needed to keep yields down and support the economy.
The U.S. Federal Reserve currently appears to be resistant to the idea of instituting new yield curve control measures and shrugged off the impact of rising yields in the U.S. Treasury bond market. Federal Reserve Bank of Richmond President Thomas Barkin said in an interview that he remains optimistic the U.S. economy will continue recovering and rising government bond yields do not worry him very much. In addition, Federal Reserve Bank of Chicago President Charles Evans said he was not worried about the rise in longer-term bond yields. Also, U.S. Federal Reserve Chairman Powell said the recent increase in Treasury yields caught his attention, but he stopped short of signaling that the Fed was close to buying more long-term Treasuries each month in an effort to contain yields.
It is possible that the March 17 Federal Open Market Committee meeting could provide the right timing for the Federal Reserve to reveal a more willingness to enlarge its asset purchase program. The Federal Reserve could hint at or initiate policy tweaks then. One possible move could be the third “Operation Twist.” The term “Operation Twist” was first used in
1961 in a reference to the Chubby Checker song and the associated dance craze when the Federal Reserve employed a yield curve control policy. The operation gained its nickname due to the Fed’s initiative of buying longer-term Treasuries and simultaneously selling some of the shorter-dated issues it already held in order to bring down long- term interest rates, thus flattening the yield curve. The Federal Reserve implemented the “Operation Twist” program again in late 2011 and 2012 during market turmoil around the time of the European debt crisis.
Another possibility would be to increase the rate paid on reserves to address issues in the money markets. In addition, the Fed could adjust the rate on overnight repo operations in the bond market.
I believe major central banks eventually will employ tools to mitigate rising long-term interest rates, which will likely reduce the selling pressure on stock index futures.
SHORT-TERM INTEREST RATES REMAIN
HISTORICALLY ACCOMMODATIVE With the current focus on long-term interest rates, little attention has been paid to the short end of the yield curve. With global short-term interest rates remaining at or near historically low levels, this fundamental is the still the dominant fundamental that will support U.S. stock index futures in the long-term, and the rise in longer-term yields will only temporarily get in the way of this bull market for stock index futures.
Combining the technical rule of thumb that new historical highs often beget follow-through gains with the ongoing bullish fundamental of historically low global short-term interest rates, higher prices are likely for U.S. stock index futures.
Alan Bush Chart 3: Federal Funds Target Rate
E:
alan.bush@admis.com T: 001 312 242 7911
I BELIEVE MAJOR CENTRAL BANKS EVENTUALLY WILL EMPLOY TOOLS TO MITIGATE RISING LONG-TERM INTEREST RATES.
Source: ©2020
MoneyCafe.com
21 | ADMISI - The Ghost In The Machine | Q1 Edition 2021
Interest Rate
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