The bond market is clearly dismissing what the Fed is saying about raising terminal Fed fund rate to 5.25% and holding all year. The 2y yield dropped after the FOMC when it should be rising. Yields across all durations should be much higher than they are now if fed fund rates are truly higher for longer.
I don’t even blame the market in thinking the Fed is bluffing. After all the Fed has historically always cut rates during a recession, including for Volcker’s tenure. And we have so many forward looking indicators pointing to a recession. So the bond market is simply reading the room and following historical precedence.
The reason why I think the Fed isn’t bluffing is because JP is choosing to ignore data that contradicts him. For example, he used to make a big deal out of job vacancies being too much in comparison to those searching for a job. We now know that Fed knows that those vacancies are bullshit. The Fed is also aware that shelter prices are dropping down and in fact lagging. The Fed is well aware that the real world clearly paints a much different picture to what their data suggests. The Fed will continue to cherry-pick their lagging data in support for their goal.
A bigger tell from the recent FOMC is that there is no dissidence among the Fed. They are all hawkish. Unlike back in 2019 when JP raised rates, he has full support from the President. Either 1 of those 2 will start reversing if we have a pivot anytime soon.
The bigger picture here is that the Fed really don’t want to lose more credibility and want to be 100% sure that inflation is dead. I also think the market is underestimating how fast inflation drops. It drops fast at first but then progress slows down rapidly. Also the bullwhip effect makes inflation come in cycles.
The market is too premature in front running a pivot, and this sets up a counterintuitive trade to actually short bonds. I am looking at TLT puts.
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.