Has The US Treasury Hijacked Monetary Policy?

Could Bonds and The Fed Be Reacting To ‘Treasury QE’?

Its all about bonds! Much is going on – rising yields, a US debt ceiling, sizeable official (indirect) bidding at the last Treasury auction and a strong bid-to-cover, Moody’s Aa1 US downgrade, US$50bn of Treasury buybacks slated by early August – all against a background where Trump 2.0 likely needs to keep 10-year US yields below 4½%.

Although 10-year US Treasuries may be holding close to 4½% yields, there is a compelling case that they should be already much higher. In our view, active monetary policy is de facto being put in the hands of the US Treasury. A ‘Treasury-led QE’ is not a message that all investors will welcome. It may even explain why the US Fed seems less willing to cut policy rates? Evidence how despite last month’s widespread fears over a trade-induced US recession, the yield on the 10-year note (orange line) has stayed resolutely above its 200-day moving average. See chart. Ominously, term premia — the compensation investors demand for holding duration risk — are trending ever higher (black line).