The Fed Tries to Change the Bond Market Narrative

The narrative this year in the market for U.S. Treasuries has been defined by skeptical traders wrestling with the Federal Reserve for control of the yield curve. The Fed has been vanquished in all but a few instances, as the ravenous global demand for high-quality, long-duration assets overwhelms the central bank’s determination to steadily withdraw the excess accommodation that has been in place since the Great Recession.

In fact, bond traders have exhibited domination over all but the very shortest maturities in the Treasury landscape, pushing yields on securities due in 10 years and longer to their lows of the year earlier this month even as Fed looked past slower growth and inflation trends to boost interest rates for the third time since December. The bulls have had plenty of ammunition to bolster their case, as the economy stumbled in the first quarter, China continued its deleveraging efforts, the bear market in oil tamped down inflation fears, and setbacks suffered by the Trump administration in replacing Obamacare added to the notion that crucial tax reform initiatives will be delayed.