Hello, Subscribers:
Could it be case of déjà vu all over again for the long-term U.S. Treasury bond market? On September 17th, 2024, the Fed shocked markets by cutting its key overnight rate by ½% (50 basis points). It typically moves in one-quarter point increments, but despite that dramatic reduction the impact on long-term interest rates was the opposite of what was intended.
As you can see from the large circle above, the TLT ETF, representing 20-year maturity USTs, peaked at 101 on 9/16/24, the day before the Fed’s dramatic move. It would cut again by a more standard one-quarter percent in December of last year.
Yet those combined three-quarters of a percent rate reductions didn’t prevent the slide in extended maturity USTs. TLT would eventually bottom about 15 points below its pre-cut level. This elevated its yield from roughly 4% to 5%, pushing the cost of mortgage financing significantly higher. This further worsened what was already crippling housing affordability.
As you can also see in the smaller circle, this pattern is repeating, though it’s too early to tell if it heralds another severe bond market sell-off. Regardless, policymakers need to be aware that lowering short-term interest rates in the face of 3% inflation has the potential to produce unintended — and deleterious — consequences.
The raging bull market in precious metals is another warning for both the Fed and the administration that easy-money policies have the potential to backfire. In fact, one could reasonably argue they already are.
David “The Haymaker” Hay
IMPORTANT DISCLOSURES
This material has been distributed solely for informational and educational purposes only and is not a solicitation or an offer to buy any security or to participate in any trading strategy. All material presented is compiled from sources believed to be reliable, but accuracy, adequacy, or completeness cannot be guaranteed, and David Hay makes no representation as to its accuracy, adequacy, or completeness.
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David Hay is a passive owner of Evergreen Gavekal (“Evergreen”), a registered investment adviser with the Securities and Exchange Commission. As of 03/31/2025 Mr. Hay has no involvement in the day to day operations of Evergreen, nor is he involved with any investment research, or investment management performed by Evergreen. The information herein reflects the personal views of David Hay as a seasoned investor in the financial markets and any recommendations noted may be materially different than the investment strategies that Evergreen manages on behalf of, or recommends to, its clients.