There is a very strong consensus on Wall Street and in the media that our long run of super-low interest rates is the singular result of the Federal Reserve, Ben Bernanke and Quantitative Easing. As an example, Barron’s takes the Fed and Ben Bernanke to task again this week in a piece called “Ben’s Ultimate Driving Machine.” The article compares Fed policy and hyper-low rates to pedal-to-the-metal reckless driving of a high powered BMW. My take is that this over simplifies our journey to the cellar on rates and gives no credit to the paralyzing fear that gripped many market participants in recent years.
All the credit and / or blame is laid at he feet of the Fed, when in fact you couldn’t have had a sub 1.5 % yield print on the ten-year U.S. note without a scared buyer willing to take a negative real return to for the certainty of recouping their principal at maturity. I have made the point in past kortsessions that the withdrawal of QE is not the disaster the media paints it to be (see session 52).
Today’s post is a brief refresher course on recent low-water marks on the 10-year yield. At the time these lows were reached, I believe it had more to do with fear than Fed policy. That the 10-year that closed Monday, August 19, at 2.87% may be more a reflection that fear is coming out of the market than the “dreaded taper.” And it may also reflect a new fear on the part of bond holders that you may not be able to sell your bonds anywhere near par when rates go up until they mature (which could be many years from now if you own ten-year treasuries). Maybe the correction this bump in rates has brought on will go a bit further than the last (which was only good for 6% on the S&P 500). It may even get scary. But I believe it will be a correction in a secular bull market, not the beginning of a secular bear.
By now, most people have forgotten how scary spring/summer of 2012 was, in part because they were making a living, taking care of themselves and their families and not being imprinted with every bit of national and international financial news that emerged. What is interesting here is that the media and most of the financial community has forgotten the particulars, too. So, you cannot look to them for perspective. You remember, don’t you? Europe was imploding. The U. S. economy was slowing. And people were screaming for the Fed to do more (QE3). Overlay the constant drumbeat of partisan criticism in the run-up to the November election of the failed economic policies of the Obama administration…”This is the worst economy we’ve seen since the Great Depression.” (Mort Zuckerman–U.S. News and World Report). No wonder people were scared, so scared they were willing to accept a 1.47% yield on the Treasury’s ten-year note….Ridiculous! Here is a piece from the Wall Street Journal’s “Today’s Market” column (June 1, 2012), “Business Braces For Europe’s Worst.” It will bring you back to those golden days of yesteryear. Enjoy. Remember, QE3 would not be initiated until September 13. But we still managed to trade down to a 1.47% yield on the ten-year.
The eventual low yield on the on the ten-year came July 25, 2012. It was 1.404%. To give you an idea of the panic that was at work, I give you another sampling from the Wall Street Journal’s “Today’s Market” column of that date, “Dow’s Drop Is The Worst This Year.” It recounts a litany of woes including more Euro-debt troubles, signs of a slowing Chinese economy and a bad U.S. job’s number. Also the negative political rhetoric on the economy continued and intensified. Interestingly, for those of you keeping score, the Dow closed on July, 25, 2012 at 12617.32, 1464.15 points below its Friday, August 16, 2013, close. This might give you the impression that neither politicians or the media know what they are talking about. The Street continued to scream for more “QE.”
By the time election day rolled around there was a group of investors that were so afraid of the negative economic consequences of an Obama reelection, they were committed to selling stocks if that happened. As it turned out they were true to their words. Election day rumors circulated in Republican circles that Romney’s numbers had improved in several key states. The Dow was up 133 points on election day closing at 13245.66 only to see more than 700 points shaved off in the next seven trading sessions. The ten-year yield and the market bottomed on November 15, the ten-year at 1.58% and the Dow at 12,542. Neither have looked back, yet. Here is another sampling from the the Journal’s “Today’s Market,” dated November 16, 2012 “Stocks Extend Slump.”
Again, with all I have presented here, the point I am trying to make is this: the ultra-low rates we have experienced may be more the province of investor fear than a direct result of Quantitative Easing. Based on my work that, in previous sessions (35, 35B and 52), the impact of QE on rates may have been nominal (a slight overbid in the long government and AMBS markets) other than the gesture, which might have helped alleviate some of the fear that might have pushed yields even lower.
This is what I think. What do you think?
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