On today’s show we are answering a simple but important question: Is the market ignoring the Fed?
What does the yield curve tell us about the recent 0.25% rate increase announced by the Federal Reserve on Wednesday.
The shape of the yield curve can tell us a lot about the market sentiment in response to the Federal Funds rate.
We have been inverted for much of the past year.
The yield curve has flattened a lot in the past two weeks as a result of the banking crisis. We have seen demand for short term T-Bills spike which has pushed prices up and yields down.
Over the course of the day we have continued to see yields fall despite the rate increase announcement.
The banks have a choice to put cash on deposit at the fed for a rate of 4.75%. Reverse repo is incredibly flexible and secure.
But for some reason, they’re choosing not to put those funds on deposit at the Fed, which offers the highest interest rate in the market and is risk free).
We see all of the Treasury offerings, except the 6 month T-Bill pricing below the federal funds rate.
The two year is down 36 basis points over the day at 3.882%. The 4 week T-bill is at 3.91%, down 28 basis points over the day. The 8 week is at 3.98, roughly flat for the day. The 10 year is yielding 3.462, roughly flat for the day
The 30 year is yielding 3.68, down six basis points from the day before.
All of these rates except for the 6 month are below the Fed funds rate. I don’t believe there is anything magical about the 6 month T Blll other than market inefficiency at play. We will continue to monitor the 6 month to see if the trend we are seeing in the other maturities.
So what does this all mean? Should we be happy and calm or terrified?