Fed's Dudley Explains Why Bond Yields Are (And Will Stay) Low

Tyler Durden's picture

Ben Bernanke told those that could afford to hear that rates would not "normalize" in his lifetime and just last week we noted the market's shifting attitude towards what a post-rate-hike 'rate normalization cycle' might look like. As longer-term bond yields tumble, the Fed's Bill Dudley just confirmed the lower post-rate-hike "terminal rate" meme:


 In other words, if and when the Fed starts raising rates, the highest rate to which it will raise rates in the next cycle is now expected to be notably below previous historical 'norms'. And stocks didn't like it and long-term bond yields tumbled...


Of course, the slowing down of the economy, snow or no snow, is precisely the reason why bonds are bid. We explained as much recently:

"When the Fed begins lifting rates is almost not an issue any more,” Stan Jonas, former managing partner of Axiom Management Partners in New York, "The real question is how fast does the Fed increase rates and where do they stop. The market now sees diminished macroeconomic expectations and expects the Fed to ending the upcoming tightening cycle at around 3 percent."



In other words, the bond market believes in the Japanization of America and another lost decade as the new normal low/no growth world slugs along with no escape velocity dreams anytime soon.


Or even more clearly - it's about more than this cycle... the Fed's taper will run its course, the Fed will tighten rates and the economy will slump rapidly meaning the Fed will ease once again (and by then QE will have lost all credibility as anything but an asset inflation machine and along with it - the Fed's credibility)... the tumble in forward rates indicates the markets growing belief that the future growthiness looks very different from the dream priced into stocks...

Or, in other words, the Taper will lead to the Untaper, as we predicted exactly one year ago, leading to QE number... we don't even know the nuimber any more - 5,  6,  7? Rinse. Repeat.


Perhaps Plosser had it right:


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LawsofPhysics's picture

A non-voting member of the cabel of academic thieves destroying the world to serve themselves and their masters...


Same as it ever was(well at least for the last 100 or so years).

Pinto Currency's picture


If the Fed keeps this up it's going to have $30T of various bonds on its balance sheet.

CrashisOptimistic's picture

So what?

That means nothing at all.

The bonds mature, they are entitled to money from Treasury to redeem them.  Treasury sends them some, they send the bond back to Treasury, and then refund the money.  And thus:

So what?

SamAdams's picture

Yes, that's what Bernanke said too...

Dammit!  I thought this was Tuesday?

I am more equal than others's picture





No, money is looking for a safe place to go.  You guys (FED) are burning Rome. 

knukles's picture

Hah ha ha ha ha

They're gonna tighten, my ass.

Theosebes Goodfellow's picture

And remember kiddies, the "printing" trick will work, ...until it doesn't. Just like the item being printed.

sodbuster's picture

The Bernank says rates won't normalize in his lifetime? Just bear in mind- When was the last time this asshole was RIGHT about ANYTHING?????

Pinto Currency's picture


It won't just be Treasuries on the Fed's balance sheet - there are other bonds that they will have to buy.

Further, even if it was just Treasuries, we've seen how the Rube Goldberg QE money printing scheme has impacted markets.

The consumer goods inflation wave is starting to hit.

Georgia_Boy's picture

By extension, I doubt the Fed balance sheet will normalize in BB's lifetime either. The TBTFs are on permanent welfare now, and will never want to give up their interest-free trillions.

TPTB to muppet savers: Fuck you, now and forever.

Ham-bone's picture

This is also known by the term "centralization" or "command market"...the state directing capital / labor into jobs as well as directing consumers what to consume, price is controlled by government, they decide minimum and maximum price of goods according to their importance.  the government controls the factors of production (financing) and makes decisions about their use and about the consumption of output. The central planning unit takes the inputs of the economy and directs them into outputs in a socially desirable manner (or socially desirable for the 1%)

Breakdown - 17.5 T Treasury debt...

5.5 T intra-gov (S S, etc.)

of the remaining $12 T, $2 T Bills (aka, cash) owned by banks

of $10 T in Notes/ Bonds (1yr + maturity) ---> Fed and Friends (foreign CB's) own 80% or $8 T...Domestic holders (States, Insurers, Pensions, etc.) only hold $2 T...not far to go til Domestics are entirely pushed out of the Note/ Bond market...and similarly the MBS market. 


ejmoosa's picture

And what if the Fed allows those bonds to mature, and never cashes them in?  


They print what they want, the government spends what they want.


We suffer the consequences.

CrashisOptimistic's picture

Bond yields have been falling for 30 years.

They did that in an era of $15 oil.

Now it's $100+.  How in the hell is growth supposed to be stronger now than for the past 30 years with oil $100+, and with worse growth, how could yields rise?

THX 1178's picture


When Dudley says bond yields wont rise what he's REALLY saying is "we will certainly have hyperinflation."

Xibalba's picture

I don't think he knows what that is

eclectic syncretist's picture

What he's really saying is "if rates rise more than just a little bit the US deficit will explode to such an extent that our current monetary system will fail, and I don't want that".

THX 1178's picture

Rate rise= fail

No rate rise= fail

Thus spake Zerohedge

Spastica Rex's picture

How in the hell is growth supposed to be stronger now than for the past 30 years with oil $100+

Succinctly stated, +1.

As a hypothetical answer, I think we're all supposed to learn to code and write smart phone apps that we'll sell to one another, spurring perpetual economic growth and perpetually increasing living standards.

Or something like that.

CrashisOptimistic's picture

I drive past big farm fields every day.  They are plowed and planted.

They have green shoots.

They are the only things that do.

Come September and October they will harvest that food.  A day will come when some hungry someone will stand along that road and look down at their iPad, on which they have a spreadsheet telling them when they ate last.

It will be May.  They'll have to wait 3 or 4 months to even consider stealing.


DerdyBulls's picture

Arable farmland brother. Stock up. Get some Ag knowledge. And buy apartment complexes for the sheeple to crowd into.

Dr. Engali's picture

These idiots need to shut the hell up. Nobody with any critical thinking skills takes the propaganda and their rhetoric seriously as is evidenced by what is left of these bastardized markets. They aren't about to raise the short end and let the curve invert again. Not unless they want a repeat of 2008/09. It's funny how oil says they are full af sawdust. 

Theosebes Goodfellow's picture

Doc, I concur. But the catch is that you are dealing with obsessive-compulsives here. They just can't help themselves. Expecting them to shut up is futile. For them, it is imperative that they repeat themselves, as if if they say it enough times it will become logical, sensible or sane. They will be repeating their mantra even as their currency dies. They will chant it all the way down to the bottom. That is because they cannot conceive that what they are doing is doomed to fail. Their inability to see the inherent fallacy of Keynesianism is their disease.

dontgoforit's picture

We're stunted: no growth allowed.

Or, how the giant became the runt.

km4's picture

The Green Lantern Theory of the Presidency, explained http://www.vox.com/2014/5/20/5732208/the-green-lantern-theory-of-the-pre... via @voxdotcom


SheepDog-One's picture

These people are completely delusional and should be apprehended.

ebworthen's picture

Dudley:  "WTF did Plosser say?  Shit!  I'd better say something."

oklaboy's picture

Alex, i'll take economy for 200.....

derek_vineyard's picture

tell me something i dont already know

firstdivision's picture

Energy prices are the 'faux recovery' killer that the Feds are upset over.  Too many people have to put off purchases to pay to fill their vehicles, and pay their utility bills.  FERC has been pushing its nose into refiners, NG suppliers, and power companies to try to stamp down prices.  Personally, I expect power markets to end their competitive structure (PJM/MISO/ERCOT/CAISO) and revert back to the old regulated days. 



Dr. Engali's picture

Lol.... Cramer says go long JCP:



firstdivision's picture

Selling calls and buying puts, while naked shorting whatever I can on margin. 

SharkBit's picture

Dude is a serious moron.  Really annoying to listen to.  Hurts my ears and eyes.

seek's picture

I seem to recall a year or two ago someone plotted the earnings if you did the opposite of his calls, and they were respectable.

lasvegaspersona's picture

We should be so lucky to get 10 years of Japanization...though I suspect in a short time that term will mean something far, far worse that it currencly does. At present it implies slow growth. If economic production means anything in this crazy QE world it will soon mean economic collapse and 'Kyle Bass is king' signs popping up.

Or maybe I'm wrong again and nothing that used to matter still matters...happens when you get old.

OC Sure's picture



The problem is not "expecting too much from monetary policy."

The problem is having a monetary policy.

the grateful unemployed's picture

a lost decade? so what. the Japanese have done alright, other than Fukashima, zombie banks, and the rising military threat from China, its all good

nightshiftsucks's picture

And that was wih a growing world ecoomy,who's growing now ?

Government needs you to pay taxes's picture

The current course is unsustainable.  The US appears to be heading down the path to self-destruction via suppressed interest rates (fiat conjuring variant) using a depreciating dollar as a global financial weapon.  This will work until the countries on the other side of the see-saw (producers who supply the US with demand) can adequately offset these exports with their own domestic demand AND dump the dollar as a transaction settlement currency.  The world is 5 years into this conversion, and it looks like it will be 3-5 more years until the US economy gets hits with hyperinflation.  At that point, I suppose the Fedcoats will hope to control the vital resources, and citizens will be too occupied with killing each other for a meal to consider how their government caused the disaster.  I for one, am stocking up on supplies, building local relationships with future service providers, and compiling my list of people to . . . um . . . visit when the music stops. 

DR's picture

Most currency reserves are in shorter term treasuries. Exporters won't dump them but will let them slowly roll off and not buy anymore. When foreign demand goes down the US will force a restructuring of domestic pension funds into US bonds.



SharkBit's picture

Or in other words, rates can never go back up.  USD and US economy is doomed as many have been predicting for some time.  This chapter is coming to a close.  Hang those fucking money changing liars.  It's about to get ugly.

adonisdemilo's picture

If rates aren't going to normalise in Benanke's lifetime then we should get organised and send him a Home Depot gift voucher for a high quality nail gun.

JR's picture

They're asking for revolution because that's the answer. They are destroying the economy and Americans won't accept that.

Look at this, Bernanke is saying the stock market is up because everything is doing well, and Fischer and Yellen are saying we've got to do something because of the labor problem.

Bam_Man's picture

When the Fed starts raising rates

ROFLMA! That's a good one!

We are 5 years into this so-called "recovery" and they aren't even talking about raising rates before 2016. We will already be in another recession long before they get around to their first 10bps rate hike.

Once the "market" finally figures this out, the ten-year UST will be at 1.50% or less (probably within the next 6-9 months).

fzrkid's picture

Just print, who cares how big the FEDS balance sheet it.. They can just slowly dissipate through the many channels available to the FED/money printers.

CrashisOptimistic's picture

Hard to print when US T bond issuance is shrinking via sequester and tax increase.

JR's picture

"Beginning in March 2011 the central bankers began purchasing their own debt by simply electronically issuing increases in the balance sheets of the 12 Federal Reserve branch banks to offset the losses. Any businessman who did this would be in jail in a heartbeat." -- Economist Dr. Adrien Krieg

Hindenburg...Oh Man's picture

I can smell a 2pm-ish  low volume stick save in the works

JR's picture

Dr. Hans-Hermann Hoppe gives it to us straight:

Daily Bell: Where do you stand on the current central banking paradigm? Is central banking as it is currently constituted the central disaster of our time?

 Dr. Hans-Hermann Hoppe: …Thanks to the central bank, most "monetary experts" and "leading macro-economists" can, by putting them on the payroll, be turned into government propagandists "explaining," like alchemists, how stones (paper) can be turned into bread (wealth). Thanks to the central bank, interest rates can be artificially lowered all the way down to zero, channeling credit into less and least credit-worthy projects and hands (and crowding out worthy projects and hands), and causing ever greater investment bubble-booms, followed by ever more spectacular busts. And thanks to the central bank, we are confronted with a dramatically increasing threat of an impending hyperinflation when the chicken finally come home to roost and the piper must be paid. …

That’s just a partial reflection from Hoppe who calls central banks “one of the greatest mischief makers of our time.”

- See more at: http://www.thedailybell.com/exclusive-interviews/1936/Anthony-Wile-Dr-Hans-Hermann-Hoppe-on-the-Impracticality-of-One-World-Government-and-the-Failure-of-Western-style-Democracy/#sthash.LKeSYd73.dpu