The debt market emits alarm signals. In a normality scenario, long-term bonds should pay more interest than short-term ones. But this has stopped being that way. The short and long-term US Treasury yield curve reverses. It's the first time since September 2007, a year before the collapse of Lehman Brothers triggered the biggest financial crisis since the Great Depression. The rate of three-year bills opened the session on Friday at 2.47%, while the 10-year debt was below 2.44%.
Investment in the rate differential is usually considered as an indicator that anticipates an economic contraction within two years. At the moment it clearly reflects that investors bought the message that the Federal Reserve will leave the price of money unchanged for the rest of the year. Jerome Powell, the president of the monetary authority, said on Wednesday that the growth of the economy will remain solid despite its moderation.
Powell reiterated that the Fed will be patient when making a decision. The internal survey of the members sees a new increase possible in 2020. This implies that the neutral rate at this time would be between 2.5% and 3%. Parallel to the pause in the normalization process, in May the pace with which the balance is reduced to stop on September 30 will be moderated.
The last time the 10-year bond rate was below 2.5% was in January 2018, before the tension in the market skyrocketed because it was anticipated that the Fed was going to withdraw the monetary stimulus in a way faster than expected. From there it rose to exceed 3.2% at the end of November, before the nominal interest rate was placed in a band between 2.25% and 2.5%.
In this cycle, however, the interest rate differential is not very reliable due to the intervention of the large central banks in the debt market. What investors are not so clear about is whether the economy is going as well as Powell says. The projection of the Federal Reserve is to close the year with a growth of 2.1%, compared to 2.9% in 2018.
President Donald Trump took the opportunity to charge again against the Fed's strategy, saying that it would be growing above 4% if interest rates had not risen. Jerome Powell explained that there is no change in monetary policy, but he did admit that at this moment the strategy of patience is appropriate. I did not expect that the moderation in growth would have been so pronounced.
Precisely, the nomination of Stephen Moore to fill a vacant position of governor in the Federal Reserve was confirmed. The economist advised Trump during the election campaign and participates as a commentator on the CNN news network. It has a vision very similar to that of the president, to the point of recently having declared favorable to a reduction in rates.
BlackRock analysts believe that the Fed's policy is correct, because the dynamics in the economy offer contradictory signals. They cite the slowdown in China and Europe. The ideal, they point out, is that the rates had not been touched in December. But the situation, they say, is not catastrophic. "The only thing is that we entered a phase of growth below the potential", they add.
Although the Fed usually looks at the spread in the 3-month and 10-year bond rates, in the market it prefers the 2-year bond, which is at 2.35%. Wall Street opened the session with a 1.5% drop. The S & P 500 index is moving in the 2,800 points, compared to the 2,200 points in which it was in December and January in full uncertainty. The comeback began when Powell was more lax.