Red Gold: Does China Aim To Dethrone The Dollar?

Is it finally ‘go time’ in the bond market? For the moment, the answer is a strong maybe. The yield on the 10-year Treasury has burst through its 2017 highs and is behaving as if it could hit the 3% threshold, elusive since the taper tantrum of 2013.

If you’re looking for hard guidance in today’s Federal Open Market Committee statement, I’d suggest you tamp your enthusiasm. Janet Yellen has orchestrated the slowest tightening cycle in history, defying even the ‘measured’ pace at which Alan Greenspan tightened which culminated in the housing bubble bursting. The last thing Yellen wants to do at her last FOMC meeting is stir any pot.

As far as the markets are concerned, Yellen has been a smashing success. The stock market has tacked on a neat 70% gain while at 2.70%, the yield on the 10-year Treasury has barely budged. We’re talking about a move upwards of three whole basis points (bps), or hundredths of a percentage point.

But then, neither the present nor the past dictate the stuff of legacies. That, as we wise souls know, is the purview of the future. Right or wrong, the good deeds of yesterday and today can be wiped away in the wink of an eye. That’s the nature of stability. If it lingers too long, it tends to give way to its polar opposite, instability, in what Wall Street recognizes as a ‘Minsky Moment.’ There won’t even be a way to feign surprise when that moment hits given the record low levels we’ve witnessed on every measure of complacency that exists.

For more on Yellen’s legacy, please link to my latest Bloomberg column: It’s Too Early to Judge Janet Yellen.

Did I mention the strong ‘maybe’ in answer to whether the rise in yields was sustainable? The idea that the economy has gained so much momentum it can withstand four rate hikes this year certainly gives one the warm fuzzies. But it’s hard to conjure a scenario that suggests 3% GDP growth will persist into the second half of this year, especially in a rising rate environment.