FED UP: OTHER EXIT STRATEGIES (c) Leo Haviland June 10, 2013

The Federal Reserve Board proclaimed in June 2011 a framework of principles for an exit strategy from its extraordinary and highly accommodative monetary policy. Are their exit principles in the process of changing a little bit, and might they do so relatively soon? It seems so.

The Fed is not the only financial visionary with an exit strategy. Participants in debt, stock, currency, commodity, real estate, and other marketplaces also possess exit (and entrance) schemes and tactics.

What signs probably warn that (for whatever reason, including a potential change in Fed policy) there is a noteworthy (substantial) exit underway from long positions in the UST?

Those on the alert for bulls to exit (bears to enter) the UST corral should monitor German and Japanese sovereign debt marketplace yields. Also remember debt yields and trends for European “periphery” and emerging marketplace nations.

Of course US dollar, S+P 500, and commodity trends entangle with and help to explain exits from (and entrances into) UST (and other interest rate) playgrounds. How much convergence and divergence has there been and will there be between falling (and rising) UST yields and past and future S+P 500 patterns? If UST rates keep rising higher and higher (suppose they exceed the high achieved in the past few weeks), will the S+P 500 inevitably continue to move up and up? Other questions loom. If the Fed keeps repressing UST yields, what will the jury decide for the US dollar (either on a broad, real trade-weighted basis, or in individual crosses against the Euro FX, Japanese Yen, Chinese renminbi, and so forth).

Thus it apparently has become increasingly difficult (at least at low nominal yield levels) to captivate foreigners into buying UST notes and bonds (and T-bills too). The slowdown in overseas net buying of UST probably occurred after March 2013 as well. In this context, note the steady rise in rates since July 2012’s bottom (and the 1.55pc low on 11/16/12 and 1.56pc on 12/6/12). And after all, the US does have some inflation (now around 1.5 percent) and the first several years of the UST yield curve offers no (or very little) real return to foreigners or anyone else. The seven year note now yields around 1.60pc. Even the 10 year’s return is mediocre.

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Fed Up- Other Exit Strategies (6-10-13)
US Treasury 10 Year Note Chart (6-10-13)