After three consecutive months of rising 10-year interest rates, the benchmark note yield drifted lower in April ending the month at 1.62%. To put that into perspective, the 10-year rate bottomed last summer at 0.50%. The move higher has been driven by the easing of COVID-related restrictions, the resultant strong rebound in economic activity, excessively easy monetary policy and the concern that the fiscal stimulus passed by Washington will result in higher inflation.
With that, all eyes were on the April FOMC Meeting, which concluded with the committee leaving the current Fed Funds rate unchanged and a vow to continue to buy Treasury notes and Mortgaged-backed securities in the open market. In the post-meeting press conference, Powell reiterated that they believe the uptick in inflation will prove transitory and they are comfortable with the status quo. When pressed on whether the committee has begun discussions on how taper would be enacted, he responded that they “haven’t even talked about talking about taper.”
One week after Chairman Powell’s post-FOMC vow, Treasury Secretary and former Fed Chair Yellen suggested that the Fed would need to do exactly that if the President Biden inspired stimulus package was successfully implemented. Specifically, she said “It may be that interest rates will have to rise somewhat to make sure that the economy doesn’t overheat.” We imagine that as soon as her comments hit “the tape” her phone lit up with calls from various Governors and President of the Federal Reserve. By the end of the day she “walked back” the comment and for the rest of the week the media was bombarded with quotes from the various Fed members reminding that they intend to be patient with any rate hikes.
The Fed’s caution seemed to be appropriate with the release of the April jobs report which came in at 266,000 new jobs added in the month, well below the 1,000,000 expectation. There are some who hold the report up as evidence that the economy is a long way from being back to normal, while others blame the enhanced unemployment insurance acting as a disincentive for the unemployed to get back to work. We think it’s a little of both and point to the lesser watched Job Opening (JOLTS) survey which showed there are currently 8.12 million unfilled job openings in American, an all-time record.
The Fed’s patience is likely to become more difficult to defend as the economy is operating at a robust pace, with more and more activity coming back online. The April Consumer Price Index rose 4.2% year-over-year, above the 3.6% consensus expectation, with nearly all segments showing price appreciation.
At the March FOMC meeting, the committee announced that they would expand the Reverse Repo availability to $80 billion per counterparty up from the previous $30 billion per counterparty. The RRP is essentially a de facto overnight security issued by the Fed to select counterparties including banks and certain money market funds. The presumption at the time was that the Fed wanted to expand the program to sop up so much of the excess liquidity in the system. The interest rate payable on the RRP is 0.00%. Prior to mid-April, the facility was only doing total volume of between $20 to $30 billion a day. At month-end volume surged to over $100 billion and recently has grown to over $200 billion.
In and of itself, the uptick in RRP is nothing more than further evidence that the Fed has flooded the system with liquidity. However, we’ll continue to watch the volume for clues to changes in that liquidity.
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