Our beloved Treasury Department today announced that they are considering issuing new 30-year bonds. Well, its about time! Considering the precipitous levels of debt being issued by our government, it is beyond me why they havent been locking in these historically low rates sooner. In fact, it is beyond me why any individual homeowner with an ARM hasnt converted to a fixed-rate mortgage, yet. But thats another story.
Todays news caused the long end of the yield curve to rise. The interpretation was that more supply on the long end would drive prices down. I dont buy that interpretation. There is plenty of liquidity to sop up those bonds. Nevertheless, todays move, if sustained, plays very well into the Feds hands. With higher long rates, the FOMC has more wiggle room to raise short rates without inverting the yield curve. Almost makes you think theyre talking to each other, doesn't it? It is peculiar for the Treasury to announce that they are considering the issuance of 30-year bonds rather than waiting until a decision has been made.
Apparently, the market does not agree with my belief that the only reason the Fed hasnt tightened more aggressively is because long rates havent cooperated by going up. Instead, the market seems to think the Feds post-statement statement means they want to stop raising rates as soon as possible (a viewpoint which I refuted yesterday). Despite long rates rising today, we saw a firm rally in equities, including even greater moves in the homeys (CTX up 1.5%, TOL up 3.1%). Likewise, metal stocks firmed up nicely (PAAS up 2.2%, NEM up 1.9%) in anticipation of future rate hikes being mitigated.
We are in an interesting crossroads, and the next few weeks are sure to give us mixed signals. The markets are likely to have big, choppy swings in both directions. Navigating this period will be very much like trying to overcome seasickness. One must focus on the horizon (i.e. keep the longer-term perspective in focus) and keep position sizes small enough that a big swing one way or the other wont cause you to panic.
Disclosure: Long PAAS, NEM. Short CTX, Long TOL Puts.