美联储维持利率不变，债券市场抗议

Hey everyone, thanks for dropping back into the macroverse. Today, we're going to talk about how the Federal Reserve held interest rates at 3.75% and the implications of that on the bond market and risk assets. If you guys like the content, make sure you subscribe to the channel, give the video a thumbs up, and also check out the sale on Into the Cryptoverse Premium at intothecryptoverse.com. If you do enjoy these more macro discussions about how it's affecting investing in different asset classes, I think you would like coming to the first ITC conference taking place in Miami on November 20th through the 22nd.

So, make sure you guys check that out. Link is in the description below. We're going to be raising those prices in a few weeks, so make sure you guys get your ticket in the meantime. Let's go ahead and jump in. So, we just did a video yesterday saying that the Fed was unlikely to hike rates in July. Now, there were some banks thinking that it might actually happen, but you know, the the markets didn't think it was going to happen.

They said about a 2/3 chance they would hold constant, and in fact, they did. And what we said was what made the most amount of sense from that ties everything in to like the business cycle and a potential correction coming by the S&P 500, which normally happens in the back half of midterm years, and then a future market cycle bottom by Bitcoin, how it all ties together. And what we said was it would make the most amount of sense if you need a narrative, not that you need one, but if you require a narrative, the narrative is just simply the Fed doesn't cut or they don't Sorry, they don't raise rates at the July meeting.

And because they don't raise rates, the bond market starts to revolt. And sure enough, look at the 30-year yield today. The 30-year yield has been trying to get through 5.2% for years, right? Ever since really October 2023 when it hit that level. And now the Fed was unwilling to raise rates. And what happened is the bond vigilantes are revolting. And they're saying, "No, we used to be more worried about inflation than the labor market."

Now, I know what some of you guys are thinking, right? Oh, inflation's not an issue. Why why worry about inflation? But there's a lot There's a reality here of There's just a lot of uncertainty about inflation, right? I mean, yes, oil has come down, which is a good thing, right? I mean, oil has dropped a lot, but look at you know, look at XLE. This is something that I I've talked about for a while. Look at this thing.

And look at how I mean, it it wasn't even that far away from a new high just a just yesterday, basically 2 days ago. There's a lot of uncertainty in you know, in the energy markets. And normally, from a business cycle perspective, energy is one of the last things to top. Right? And we haven't even had the IPOs by OpenAI, etc. So, you would thought that sort of is like this future thing. So, I I I think as it you know, as we think about Sorry, I need to make this Hold on a second.

Sorry about that. Uh wow, I'm going to get a lot of complaints about that. The video my video being large. Um when you think about it, right? This all makes sense. The Fed doesn't hike. The bond vigilantes revolt. And they're like, "Oh,

[laughter]

you no way, right? Oh, hell no. You you you can't get away with this. The 30-year yield breaks out. The 10-year yield What did we say the 10-year yield would do? That it would head back to where it was in October 2023. It's on its way. That TLT we go sweep the lows from October of 2023 and guess where it's headed? To those lows. It all makes sense. And so, what I what I could see happening is if the labor market data still comes in strong.

And I know people like, "Well, the labor market isn't that strong." I kind of agree with you in some sense. Like, they're not hiring. There's not a lot of hiring. There's not a lot of job openings. But, the reality is there's also not a lot of layoffs. If there were a lot of layoffs, initial claims wouldn't be so low. I mean, the last time initial claims were at like 187,000 was what? Like, five decades ago or something?

Yes, it can change quickly. But, the problem for the Fed is that you have a labor market that is heating up in the sense that you're not really seeing layoffs. The unemployment rate has been coming back down. And one of the reasons that inflation was starting to get tackled was because wage inflation was coming down. But, if the labor market starts to tighten back up, that could lead to fears about wage inflation going back up, which could then lead to headline inflation going back up.

Yes, it pulled back. So what, right? I mean, it's not like we've never seen a spike before where inflation didn't pull back before going higher. Um like, I mean, look at look at this over here in the '70s. It spiked up to 7%, came back down to 6.2, and then still ran to 14. So, this time we've spiked up to 4.1 and we back we drop back down to 3 and 1/2. You know, you have to wonder is the Fed should are should they have raised rates today?

And if you look at the two-year yield, then I think absolutely they probably should have raised rates today. But, while they should have, we still put out the video yesterday, this video right here, saying they wouldn't, right? Saying they likely wouldn't. And what what and this actually is is key to look at this. Look at the probability of a rate hike or the probability that rates would be at 4% by September. Or let's say that the probably they won't be at 4%.

Only 23% chance. Now that we had this press release, now that we had the press conference by Kevin Warsh, where is it now? It was 23% chance that the Fed would still be at 3.75 by that September meeting. Now, by the September meeting, almost a 43% chance they'll still be at three three and point 75%. So, it's not just that they didn't hike rates, but now market participants are not as sure that they're going to hike rates in September.

So, what and and Kevin Warsh even talked about He said that rates were going up, right? Long end was going up. It is. And if if the bond market thinks that the Fed isn't going to get a handle on this thing and if they're not going to hike rates, there's only one direction for the for yields to go, and it's up. They have to go somewhere. They're either going to trend up or down. They trend down more so when when there's fears in the economy and and and you think and markets think that we're, you know, too tight.

But right now that's not the case. And you might say, well, why do they need to raise rates? What's really changed? The neutral rate is arguably what changed. Now, the neutral rate is an abstract concept, right? Like it's not there's not like a clear definition of of like what the neutral rate even is. You know, is it 3%? Is it 2%? Is it 4? Is it 5? Good luck finding a consensus on that. But I think, as well as many others, I think that one of the best approximations we have for the neutral rate is the two-year yield.

In fact, for modern portfolio theory and calculating out the Sharpe ratio or the Sortino ratio, a lot of times people might use the two-year yield as the risk-free rate. So, when you look at the two-year yield, back in March, the two-year yield was at 3.4%. So, when you have rates at 3.75%, that's theoretically restrictive because it's higher than the neutral rate. The idea is that when the Fed funds rate is higher than the neutral rate, the the market start the economy starts to contract.

When the Fed funds rate is lower than the neutral rate, the economy starts to expand. So, you could argue that back over here in early 2026, let me overlay um interest rates on the here. We'll we'll put this on the the scale. You could argue that back over here we were not restrictive. Or sorry, no. You could argue that we were restrictive. My mistake. You could argue that we were restrictive because the two-year yield was below the Fed funds rate.

So, restrictive.