Halyard’s Weekly Wrap – 1/28/22
As economist debate the message Chairman Powell delivered to investors on Wednesday, the fact remains that the Fed continues to pursue emergency monetary policy. For evidence, one need look no further than the bi-weekly System Open Market Account Holdings report that was released this past Wednesday. The report, essentially the Fed’s balance sheet, has swelled to $8.3 trillion, up from $7.74 Trillion on September 1st. More than one half trillion dollars injected into the economy in the last four months! Much was made about the Fed beginning balance sheet runoff before the tightening cycle begins, but shouldn’t the street be outraged that the Fed will continue to manipulate the yield curve lower at a time when they should be allowing market forces to do some of the work for them and push rates higher?
That’s not to say market forces aren’t having any impact. The 2-year note looks to close the week at 1.17%, 17 basis points higher than last Fridays close. However, sellers of 30-year notes were conspicuous in their absence as the long end is closing out the week unchanged. To put that into perspective, with consumers expecting 4.9% inflation over the coming 12 months, as measured by the University of Michigan Survey, investors are willing to lock up a 30-year investment at 2.09%. Historically, investors have demanded a yield-to-maturity of at least 100 basis points over the rate of inflation. Using that rule of thumb, the 30-year bond is $51 points over valued. To be clear, if the yield-to-maturity of the 30-yer bond were yielding 5.90%, the price would be $44 per bond, not the current $95 price at which it trades. Even if one believes that the Fed would be successful in reducing long-term inflation back to 2.5%, the long bond is still over-valued by 25 points. Bond math doesn’t lie!
Attention next week will turn to the January employment report on Friday. Consensus is for a more trend-like gain of 172,000 and lower than the 199,000 new jobs registered in December. Given the ongoing demand for labor we wouldn’t be surprised is the actual jobs gain comes in around 200,000.
This commentary is being provided by Halyard Asset Management, L.L.C. and its affiliates (collectively “Halyard” or “we”) for informational and discussion purposes only and does not constitute, and should not be construed as, investment advice, or a recommendation with respect to the securities used, or an offer or solicitation, and is not the basis for any contract to purchase or sell any security, or other instrument, or for Halyard to enter into or arrange any type of transaction as a consequence of any information contained herein. Although the information herein has been obtained from public and private sources and data that we believe to be reliable, we make no representation as its accuracy or completeness. The views expressed herein represent the opinions of Halyard Asset Management, LLC, or any of its affiliates, and are not intended as a forecast or guarantee of future results. Past performance is not indicative of future results.