10-year UST

A year of extremities is not showing signs of slowing as we begin to move through 2020's final month.

Let's Take a Look:

December began with a bang: Powell and Mnuchin in the Senate, renewed discussions on fiscal aid, dramatic selloff on the long end of the US Treasury curve and the nomination of the first female Treasury Secretary.

Fiscal Aid, Mnuchin and Powell

There has never been a time when so many have agreed, yet nothing gets done. In watching the testimony of Chairman Powell and Secretary Mnuchin yesterday, the fear and concern level on the part of our elected officials is clearly high.

The economy is slowing and many more jobs are at risk over the next two quarter: permanent job loss. Market trades optimism.

We have been writing about the issue of "time matters". And how many small businesses are at further risk with fiscal inaction: how many that have already been impacted. Cash is still king as we continue to fight this pandemic and the phones in Washington are ringing for help. 

We don't fault Secretary Mnuchin for pulling back on the Fed's emergency programs. The Fed is not in the business of lending.

And although these programs acted as an effective backstop earlier in the year, the pockets of the economy most in need right now require fiscal support. It seems logical with capital markets functioning extremely well, and $450 Billion in appropriations sitting idle in the Exchange Stabilization Fund, to find a way to reapply that money sooner than later: spending. In the end, small businesses and individuals don't need more debt right now. The economy needs spending. 

President-elect Biden indicated any such "lame duck" fiscal package would only be the beginning. The USD has clearly been on the move lower and rightly so. Between the Fed, Janet Yellen's appointment to head the Department of Treasury and more fiscal spending, the direction of choice appears appropriate. 

Fed Takeaway From Senate Testimony

In our morning notes this week we spoke about maximum employment and the changes the Fed made to its framework in August: "broad-based inclusive and looking at shortfalls".

Ironically, this moved front and center in questioning this week on two front: 1) does the Fed do enough in general for minority communities and inequality and 2) should the Fed let the unemployment rate run through a 3% level.

Regarding point #2, Powell did not hesitate to refer to the Fed's new framework (Phillip's curve dead), emphasizing "what the Fed knows now that it didn't know then": the Fed can let employment run hot without stoking inflation. Clearly this remains to be seen as we emerge from a once in a lifetime pandemic. But this is and will continue to be the party line and wager from the Fed.

On Point #1, Powell discussed a notion we wrote about in our morning notes yesterday: The Fed will be looking much more closely at broader metrics of employment when making policy decisions. By no means has the Fed made quantitative assessments on the new maximum employment, but Powell has referred consistently to "earlier in 2020" when the U3 UE rate was between 3-4% and what that meant for employment in lower income and minority communities. We expect this theme to grow and will most certainly garner attention today in front of the House Financial Services Committee. 

Markets

The long end of the US Treasury market has been going everywhere, yet nowhere. Whipsaw.

1) Blue wave on, Blue wave off

2) Vaccine on, Covid on the rise

3) Fiscal aid "on" (yesterday), ????

We've been expressing a 75 to 95-basis point range in 10-year UST since the beginning of November. There is certainly a contingent of market participants that would like to see 10-year rates break 1%. No secret from there we likely get a further move toward 1.20%. Those flows along with steepening bets have been swinging the market back and forth with "good news being met by bad". In the end, Treasury volatility is near the lows. 

The Fed is in no panic with rates here. We've discussed. Financial conditions are still very loose and the recent US dollar weakness helping. Equities making new highs and with the search for yield in force, credit spreads down the curve are firm. This all despite the announcement to pull back on some of the Fed's facilities. The demand for yield is not leaving us anytime soon. The Fed will not let financing rates move meaningfully higher at this stage of the rebound, but they equally will not overreact to every basis point move in 10-year US Treasuries unless accompanied by a broader move in financial conditions.

Close eye on the US 10-year.