The 10-Year Yield Is Doing The Fed's Work
I am pleasantly surprised by the upward move in the 10-year Treasury yield.
One of the great fallacies of the Fed’s tightening period was that by raising rates, the Fed moved the entire Treasury yield curve into positive “real yield” territory as nominal Treasury yields were/are north of CPI. Perhaps that is true at the very front end of the yield curve with short-term T-Bills. Afterall, one could do worse than a 5% yield on a 4-week T-bill.
However, if I’m getting paid a 3.7% yield on a 2-year Treasury note, or, worse yet, a 3.8% yield on a 10-year Treasury note, does anyone really believe that I would earn a positive yield on either note? Surely real world price inflation would exceed the yield on either note.
Even a 5-year high yield corporate note with a 7% yield would not earn a positive yield in real terms the way the Trump and Biden administrations have spent money the past few years, subsidized of course by the Fed and sovereign debt holders.
For example, the U.S. has run a $1.9 trillion fiscal deficit (up 24% year-over-year), through the end of August (Treasury has not published deficit figures through September year-end as of this afternoon).
I expected elevated deficit spending this year by the Biden administration given that 2024 is an election year. However, the U.S. desperately needs to control spending. I would not be surprised to see price inflation accelerate in the near term. If that were to happen, Powell would have egg on his face. He waited too long to work to curb inflation, and once he rolled out QT, he did so at a pace that was far too slow. The Fed never really curbed the money supply in a meaningful way and therefore never really fought price inflation.