Powell Says Foreign Buyers Distorting Yield-Curve Readings

(Bloomberg) -- Federal Reserve boss Jerome Powell appears unperturbed by the fact that longer-term bond yields remain low even as officials lay the ground work for tighter policy and inflation is ticking higher.

While the drop in longer-term rates may be viewed by some as indicative of where so-called terminal rates for U.S. policy might ultimately lie, Powell on Wednesday emphasized the impact of ultra-low yields in places like Japan and Germany in helping to keep them anchored. 

“A lot of things go into the long rates and the place I would start is just look at global sovereign yields around the world,” Powell said at a news conference following the Fed’s final scheduled policy meeting for the year, which saw officials ramp up the pace of stimulus withdrawal and boost predictions for rate hikes in 2022. The Fed Chair noted that rates on Japanese and German government bonds are “so much lower” than those on Treasuries and that with currency hedging taken into account American debt provides investors with a higher yield. “I’m not troubled by where the long bond is,” he said. 

This stands as something of a contrast to the view expressed back in 2005 by one of Powell’s predecessors. Back then, Fed chief Alan Greenspan described a decline in long-term bond yields even in the face of six policy rate increases as a “conundrum.” 

Japanese investors piled into U.S. bonds in October at the fastest pace since just before the pandemic struck, Treasury data show. Net purchases from investors in the Asian nation increased to $9.93 billion, from $7.81 billion in September. While 10-year yields rose to a five-month high of 1.70% in October that are now down about 25 basis points from that peak.

According to Powell, the move in longer-end rates may provide “some assessment” about the course of Fed rates over the cycle and officials have their own estimates, but those types of predictions are very speculative. “Those are highly uncertain,” he said. “We’ll make policy based on what we’re seeing in the economy rather than based on what a model might say the neutral rate is.”

The yield on the U.S. 30-year bond has fallen to around 1.86% from a peak this year of 2.51% in March. The fall in long-end yields has come as shorter term rates have climbed sharply, causing the yield curve to flatten. And that has some investors worried. 

There are warnings from some that the flattening of the curve and slide in long-term yields means that growth is at risk and that the Fed will need to end its upcoming tightening cycle sooner rather than later. And indeed that is evident in short-end market pricing too, which suggests rate hikes will peter out long before the forecasts of Fed officials indicate.

For now, though, Powell is preaching a message of calm and keeping firmly focused on economic outcomes. “We’re really focused on broader financial conditions” he said Wednesday.’ “We’re focused on maximum employment and price stability.”

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