FOMC Chairman Ben Bernanke said in his testimony Wednesday that he believed financial markets were finally getting his message. Specifically that the Fed will continue to stimulate the economy as long as the unemployment rate remains above 6.5% and inflation is under 2%.
It's nothing Bernanke hasn't said in every speech, comment, press conference or statement for about the last year. The reason Bernanke feels compelled to make the point again is that the bond market has started doing it's own thing despite, or perhaps in spite of Bernanke's commitment to keep rates at or near zero percent.
Between May 2nd and July 5th rates on the 10-year Treasury have gone from 1.63% to over 2.7%. Rates have inched back below 2.5% but show no signs of retracing the entire move. There are only two explanations for yields moving so far so fast. Either bond traders think the economy is improving faster than anyone thinks or Bernanke and the FOMC have lost their ability to control the market.
Jonathan Hoenig of Capitalist Pig is betting on the latter. He makes his case for an extended drop in the bond market (meaning higher yields) in the attached clip. "It took 30 years for interest rates to come down," Hoenig explains. "I think it's going to take more than two months for them to move higher."
It's a nightmare scenario for the Fed.
Everything the Fed does is about controlling the rate at which so-called "risk free money" can be borrowed. Per economic theory U.S. debt is the standard by which all other assets are priced. Quantitative easing, Operation Twist and holding the official Fed fund rate at 0% have different explicit goals but they all come down to controlling rates.
Count Hoenig among the growing body of market participants who thinks the bond market is done doing the Fed's bidding.
"For my money and my investors' money at Capitalist Pig (a move higher in rates) is the best and most prominent trade and trend in the market right now," he states.
Having lived through the Internet, housing and gold bubbles Hoenig knows setting concrete price targets is a mug's game. "I wouldn't be too surprised if you saw the 10-year get up to five, six, even seven-percent after this move is done, surprising everyone who believes the Fed has this matter well under control."
Suffice it to say, if and when rates get to seven-percent it will be clear to all that free markets are beyond the control of the Fed or anyone else.