Rally in Rates Makes the Case for FOMC to Pull Back Faster?

01/30/2018 11:20 am EST

Focus: MARKETS

Robert Savage

Partner & CEO, CCTrack Solutions

The rally up in rates maybe makes the case for the FOMC to pull back the punch bowl faster and that will be something to watch for in their statement later this week, writes Bob Savage, CEO of Track Research.

The speed and size of the bubble make clear the difference between good Champagne and bad sparkling wine. Quality needs no provenance, but quantity does.

So too, the same is true for markets as the bubble up in yields and equities, oil and most forex against the U.S. dollar (USD/EUR) are measured in crystal flutes. U.S. bonds are the focus for markets Monday morning as the 1Q supply expectations bubble up and collide with FOMC balance sheet roll-offs to make obvious the government will be selling much more debt to the global markets.

The US Treasury announced new auction plans Monday morning making the rather mundane event exciting. The premium for such entertainment is worth 5bps in 10Y.
Of course, there are plenty of other factors driving up U.S. yields – growth expectations for 2018 are highs – witness the NABE survey, the GS forecast shifts, the ongoing 4Q earnings reports with robust 1Q outlooks for the S&P 500 (SPX) and the cacophony of comments at Davos from the world elite about 2018 global coordinated growth.

Leverage is in demand again and that means the cost of money is rising everywhere but the U.S. leads that charge today.

The return of correlation for USD and U.S. rates is a welcome relief to some but unlikely to help risk-on moods even as the bubbles rise to the top.

U.S. markets face the divergence of 4Q earnings supporting shares against present yields dampening them along with the USD bounce cutting back some exporter dreams. The rally up in rates maybe makes the case for the FOMC to pull back the punch bowl faster and that will be something to watch for in their statement later this week.

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