Breakout

Historically Low Yields Won’t Budge the Fed in June: RBS’s Girard

Breakout

With the frayed Eurozone under increasing pressure, our own economic data trending lower, and Treasury yields touching record lows, you might think that the Fed would have all the ammunition it needs to extend its policy of easing. While many market watchers have been calling for some version of renewed stimulus, or QE3, to be announced at the FOMC's upcoming meeting on June 19 and 20th, Michelle Girard, Sr. Economist at RBS is not one of them.

"I think at this point, the Fed is going to sit and watch and wait and will not do anything in June," Girard says in the attached video clip. While you can never rule out such things entirely, she thinks the odds slightly favor no action, if only because "it's very hard to argue that another 10 or 20 basis points will make much difference" with yields already at these levels.

As she sees it, the September meeting is more likely to deliver a move than June is, but believes, whenever the followup to Operation Twist actually occurs, mortgage-backed securities are apt to be part of the next stimulus plan.

Speaking of yields, Girard says there's no telling how low the U.S. 10-year Treasury (^TNX) can go and knows several strategists who say getting down to 1% is actually in play.

Normally, yields this low suggest that a recession is at hand, she says, but the flight from Europe and the Euro (EURUSD=) have distorted things this time. Should that crisis change or suddenly improve, Girard warns that the environment could turn on a dime and "you could see yields move back up pretty quickly."

"Normally, with yields this low, it is the market betting on a recession," she says, "but I think this is really more about concern over where to put your money with no other global alternatives."

Rates

View Comments (49)