Let me tell first that the topic of interest rates and Fed policies is beyond my qualifications, so I’m not here trying to teach anyone but rather just share my thoughts.
I do believe that Federal reserve and not 100% open institution, and what they say and what they do is two different things. I want to see what they do.
This chart shows the yield of 10-year Treasury note divided by dollar index. When the curve goes up it means the increase in interest rates does not increase the foreign interest in dollar. Small curve above is S&P 500, which is clearly in reverse correlation, maybe with some delay. We are making some fresh 11-month tops on this chart:
I don’t know to which extend Treasury dept. and Feds may control the 10-year yield, but I assume that they do have some control. If that’s true it looks to me that they are trying to protect the falling dollar.
At what price? The negative effects of increasing 10-year yields are:
- It hurts the mortgage rates right at the time when the real estate collapse is getting even more painful
- It compresses the junk bonds spreads from below right at the time when junk bonds investors are taking risks for peanut rewards
- Again, the dollar a.k.a. petrodollar
- Small banks who can charge more on what they lend. It might be another reason, as if Feds are spotting that some parts of the banking sector are in distress the increase in long-term rates may save them
So what is the reality? I don’t know