The yield on the 10-Year US Treasury bond has climbed from 2.41% at the start of 2018 to as high as 3.24% in early October.
The bulk of the move has come in two waves; the first in January and February, and the second in September and October. In both instances, the S&P Homebuilding Industry Index declined sharply, as rising mortgage rates made it more expensive to finance a home purchase.
While the Fed doesn’t explicitly control the long end of the yield curve, it certainly has the ability to put pressure on it. By virtue of raising short-term rates and by continuing to let more of its maturing balance sheet roll off without reinvesting, the Fed has generated upward pressure on the longer end of the curve.
For many years the Fed tempered its intention to normalize policy so as to not risk disrupting the recovery.
More recently, however, with Chairman Powell at the helm, the Fed has exhibited more confidence that the economy can withstand the continued removal of accommodation.
This month the housing and stock markets have shown they may not have the stomach to digest the tightening pace that the Fed has indicated. Even though Fed policy is still accommodative by historical measures, it is still much tighter relative to where it was for the previous eight years.
As December’s FOMC meeting draws nearer, investors will no doubt be closely monitoring how the Fed interprets financial markets and whether or not they affect future policy decisions.
Unless otherwise noted, data is sourced from Bloomberg.
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