Yield Curve Still Inverted Despite Fed Rate Cut

-edited

Despite yesterday's rate cut and significant moves higher in long-dated treasury yields, numerous inversions remain.

Fed Fails to Un-Invert Yield Curve

Huge portions of the yield curve remain inverted, just not as deep as a few weeks ago.

At the long end, the 30-year bond yield rose from 1.938% on August 28 to 2.375 on September 15.

Today, the long bond yield is now back to 2.22%.

Fed Struggling with Rates

The Effective Fed Funds Rate should be in the range of 1.75% to 2.00% following yesterday's cut but it isn't.

Yesterday, the rate should have been in the middle of the range of 2.00% to 2.25% but was at the high end. On Monday it was at 2.30% and thus outside the range.

The Fed has been struggling for day keeping interest rates in its target range.

On September 17, I noted US Overnight Interest Rate Surges to 10%, Fed Injects Emergency $75 Billion.

10% is more than a bit outside the range but the effective FF rate closed at 2.30% following emergency injections. The emergency injections continued for a third day today and will continue for a fourth day tomorrow.

Something is very wrong somewhere.

Mike "Mish" Shedlock

Comments (26)
No. 1-10
Marketwatchfuture
Marketwatchfuture

I believe the reason for the Feds struggling with rates is that the tax collections are way down due to the 20% tax break for small businesses. In addition, professionals and small businesses set up new defined benefit pension plans because they could essentially no longer deduct state taxes and mortgage interest for 2018 so they set up these new plans for 2018 and the money needed to be deposited for 2018 on or before September 15, 2019. So there is a cash crunch due to all this idle cash going into defined benefit pension plan brokerage accounts.

FloydVanPeter
FloydVanPeter

Who the heck needs $100B-s in emergency funding and able to hide in plain sight?

@Marketwatchfuture - thanks for sharing. I wonder. Is this so simple? Millions of small biz and individuals direct a small portion of their out-flows differently?

Harry-Ireland
Harry-Ireland

'Something is very wrong here'....indeed. I don't want to see people lose their jobs. Hoping for a recession is always wrong -do you hear me, Bill Maher?- but in all honesty, I think it's not only inevitable, but perhaps much needed. I mean, seriously....how long they can keep this up?

CautiousObserver
CautiousObserver

Between explanations from @country Bob and internet research, I am thoroughly confused.

  1. If a large bank does not have acceptable collateral to borrow at the official overnight rate from the intermediaries, why would their refusal to lend to that distressed borrower affect the published FF rate? Am I to understand intermediaries cannot say "no" without affecting the published rate?

  2. If the intermediaries are flush with cash due to excess reserves collecting IOER and yet they still will not lend to the bank that needs funds for 24 hours except at very high rates, why on earth would the Fed go around the intermediaries and use a repo operation to lend to this borrower directly?

  3. Powell reinforced the explanation that this problem was due to a timing mismatch between Treasury issuance and reserves/cash on hand. He suggested an open ended POMO (QE) might be created at some future date to better match "organic growth." Don't the intermediaries (primary dealers?) have something like $1T in reserves collecting interest at the Fed? Can't they lend against that if they want to?

WTF?

truthseeker
truthseeker

I think all the problems the Fed is having in the credit markets right now can be summed up by an idiom referred to in the Old Testament as “The Handwriting on the wall” based on a true story describing signs of an approaching doom, a signal that a catastrophe is about to occur.

lol
lol

Economy so ridiculously bad for such a ridiculously long time...only option left on the table is.....drum roll....QE forever/NIRP....forever....printing...….quadrillions,forget trillions,fed will print biblical levels of fiat (gloves comin off) in the next round of (overt)QE.....forever..... until they can't!

CautiousObserver
CautiousObserver

Attempting to answer my own questions posed earlier on this thread:

Could most of the Federal Funds shortage be due to large Treasury issuance recently sucking liquidity out of the banking system (i.e. money going to Treasuries is not available to lend to peer banks at Federal Funds rate)?

Possibly the reserves from QE parked at the Fed earning IOER were already 100% pledged for the prior purchase of Treasuries, so they are not at all liquid?

Federal Reserve only just this week realized that large Treasury issuance caused a shortage of cash that is expressing itself in the short term interbank funding market. They chose to call this a "timing problem" instead of a "US Government Funding Problem?"

Could "Organic Growth" be a euphemism for "Growth in the economy underwritten by federal deficit spending, and requiring monetization by the Federal Reserve on an ongoing basis to be sustainable?"

I am reaching at straws here. Insight from someone with a deeper understanding would be welcome.

Sechel
Sechel

The New York Fed plans to do another $75 billion overnight repo operation on Friday. It follows liquidity doses of the same size Thursday and Wednesday, and $53.2 billion on Tuesday. The central bank is deploying this remedy for the first time in a decade.

What the hell is going on ?

CautiousObserver
CautiousObserver

@Sechel : The Bloomberg article linked below covers it. The main complaint I have about this explanation is the author says the Fed is not doing QE this time, because although the balance sheet will expand (permanently) either way, the Fed's reason for doing it this time is different than last time, and that makes it "not QE." How does the Fed possibly expect Congress to make prudent fiscal decisions when they keep equivocating about the fact they are monetizing?

Maximus_Minimus
Maximus_Minimus

A taste of a market based interest rate if only for a few days. However, the market has been destroyed the FED, so it is in its own trap.