10-year Treasury yields sit around 2.72% and will climb higher as the Fed: a.) lifts the Fed Funds Rate and, b.) trims its balance sheet (i.e. quantitative tightening “QT”). There is no scenario in which the Fed executes QT only to have Treasury yields move lower. It is simply a question of supply and demand.
QT is not particularly well understood, even by many Fixed Income analysts. There is no scenario in which the Fed will trim its Treasury holdings by approximately $60 billion per month only to see Treasury yields move lower. It is a case of supply and demand. If the Fed does indeed execute QT as planned (or anything reasonably close to plan), Treasury prices will move lower and yields higher. Period. The only way to drive prices higher and yields lower would be if a large buyer(s) stepped into the market and absorbed all of the Fed’s selling activity. That buyer does not exist. Therefore, treasury prices are headed lower for months to come and yields are headed higher (given the inverse relationship between fixed income security prices and yields).
The Fed single-handedly subsidized the fiscal excess put forth by the Trump and Biden Administrations which spent at unprecedented levels, grew Public Debt outstanding to unprecedented levels and enabled record price inflation. China and Japan no longer have the appetite for U.S. Treasuries that each had in previous decades. Therefore, the only way Treasury yields will stop climbing and work their way consistently lower will be if the Fed pivots monetary policy from QT to Quantitative Easing (“QE”). QE is not going to happen so long as the CPI is tracking at or above 8%. This Federal Reserve lacks the tools to get CPI back to 2% given our $30 trillion in total public debt outstanding. As we have written on a number of occasions the U.S. economy is moving to an extended period of anemic real GDP growth combined with elevated prices, i.e. “Stagflation”. Interestingly, stagflation was taboo to speak of last year when we published our book “Stagflation Is Imminent“, yet is now the base case scenario for many economists and market prognosticators.
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