The thing about Yellen is that she wants to hold rates as low as possible. In one sense, there is nothing wrong with that, inflation is clearly not a problem given today’s numbers and even a short spell of above-target inflation would help wages rebalance.
What leaves traders uneasy is that Yellen seems to see a formulaic picture. She’s cast aside worries about the side-effects of a $4 trillion balance sheet and is focused on the data. For most of us, a small cycle of rate hikes — perhaps to 1.00% — wouldn’t cripple the US economy but it would help to reign in liquidity and some excesses. At least we could see where the economy stands without a Fed crutch.
But with every low inflation number Yellen can bury her head a bit deeper in the sand and 10-year yields can fall further. The low today was 2.45%, why not lower? German 10s trade at 1.15%, Japan is at 0.54% and even Canada — where overnight rates are 1.00%, no QE and scarcely a deficit — the 10-year note yields only 2.13%.
There is talk that US Treasuries will continue to rally with chatter about 2.15% as a target. Yields that low would almost-surely cut down USD/JPY. The pair is near the lows of the year and bounces are increasingly shallow.
USD/JPY daily
