These are certainly interesting times.
This past week we heard from the federal reserve with regard to monetary policy, and they did raise the federal funds rate 25 basis points moreover, the Federal Reserve also confirmed that more hikes are coming. The Federal Reserve had also made it clear that they want to start reducing the size of their balance sheet by the end of this year however, in light of the almost continuous round after round of bad economic news, in my opinion, the Fed is going to have a very hard time unwinding it.
The Federal Reserve has stated that they are going to, at one point, stop reinvesting in long bonds. What this means is the Federal Reserve has no intention of selling the long bonds that they currently hold, moreover, this also means it will take decades for the long end of the curve to normalize.
I still believe, firmly, that the short end of the curve is going to rise much faster than the long end and thus we will end up with an inverted yield curve.
We are also in a situation where both stocks and bonds are rallying at the same time.
Both stocks and bonds rallying at the same time is more a less an unusual situation, and something has to give at one point.
The way I see it is the rally in the bond market will continue at its current pace, which also means the yield curve will continue to flatten until it inverts. I also believe that stocks have the potential to rally further in the short run, but will in fact roll over as the yield curve again continues to flatten out.
In my opinion at this time, the Federal Reserve is going to have a very difficult time, if not an impossible time, attempting to normalize their balance sheet starting this year. Moreover, the fact that the Federal Reserve is already attempting to normalize interest rates by raising the federal funds rate and yet yields continue to drop, tells me loud and clear that the debt market is critical, and the Federal Reserve is way behind the curve.
Gregory Mannarino