Notes From Underground: Does the Market Care About Forward Guidance?

Forward guidance is a key tool in the Federal Reserve’s arsenal, promoted in a speech long ago by Columbia University professor Michael Woodford at the Jackson Hole Symposium. In a previous communication, the central bank said, “Forward guidance is a tool that central banks use to provide communication to the public about the likely course of monetary policy.”

This tool allows the FED to establish a time-directed path for interest rates so that the MARKET does not suffer shocks from an upward surprise move in rates.

It’s interesting that the FED doesn’t preset itself on lower rates and will actually CUT rates with a wider range of action. Interest rates go down much faster and in greater amounts than rates moving higher, except when Paul Volcker was fighting inflation from 1979 to 1981. Even under Alan Greenspan the FED raised rates 17 straight meetings and always by 25 basis points. The central bank continues promoting its forward guidance but the recent move in 10- and 30-year yields has been a dramatic rise.

The market is taunting the Fed as participants are turning the central bank’s FORWARD GUIDANCE on its head. The FED does all it can to anchor rates under two years as close to zero as possible via its LOWER FOR LONGER pledge. The FED‘s balance sheet is composed of $5 trillion in treasuries, 80% which are less than a duration of 10-years. Yes, the FED does also purchase $40 billion of mortgage-backed securities, which have a long-term duration — 95% $2.5 trillion in mortgages have a duration beyond 10 years.

The market is worried that the FED is behind the CURVE and knowing that the bank is buying short duration assets, investors are pushing on the longer duration instruments. This is why we’re seeing the yield curves steepen as the U.S. 2/10 has risen with all of the pressure coming from the selling of 10-year notes and further out to 30-year bonds. The FED and other central banks’ use of forward guidance is resulting in yield curves steepening around the globe. The Australian and KIWI curves have steepened even more dramatically as those central banks are purchasing massive amounts of short duration notes.

The market is using its fear of inflation to attack the most vulnerable interest rate instruments: The segment of the yield curve where the FED has not committed to buy. How long can the U.S. central bank use FORWARD GUIDANCE without deploying yield curve control? A good point of reference is the 10-year average for the 2/10 curve is 124.95 basis points, according to Bloomberg data. The curve closed at 121.6 on Friday.

Adding a respected voice to the inflation discussion and the role of central banks is Axel Weber, who is also one of the most respected bankers of the last three decades. We at NOTES FROM UNDERGROUND have written copious amounts about the former Bundesbank president and member of the ECB Governing Board. (He is currently the Chairman of UBS Board of Directors.) In a Project Syndicate article from February 17, the hard money advocate warned:

“A sharp rise in inflation could have devastating consequences. To contain it, central banks would have to raise interest rates, which create financing problems for highly indebted governments, firms and households. Historically, central banks have been mostly unable to resist government pressure for sustained budget financing. This has often resulted in very high rates of inflation, accompanied by large losses in the real value of most asset classes and political and social upheaval.”

It is Weber who adds his voice to guidance about central banks and the consequences of financial repression. The MARKET IS SENDING A MESSAGE OVER ITS CONCERNS OF THE FED’S LOWER FOR LONGER. If the NOTES AND BONDS disrupt the FED‘s battle against full employment, what will be the outcome? Logically, it’s YCC for central banks cannot allow markets to thwart their WILL.

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17 Responses to “Notes From Underground: Does the Market Care About Forward Guidance?”

  1. Michael Temple Says:


    Another nice article.

    However, both gold and USD not signaling any imminent YCC.

    While the yield curve may be approaching critical long term levels, the Fed may simply ignore ALL unless/until it derails STOCKS, for nothing else truly matters.

    All manner of commodities and things are experiencing big price run ups, consistent with widening yield curves.

    But with USD and gold signaling “no problemo”, I don’t see how or why YCC is a near term policy lever.

    What’s so bad about UST 30 yr above 2%? That is where we were pre COVID.

    Suddenly, foreigners can earn a real yield in 30 yr and can hedge the FX. Heck, real yields have spiked to NEG 80s in UST 10 yr.

    That is the opposite of fearing YCC, for real yields should be going NEG and not climbing higher.

    Gold is a manipulated market, to be sure.

    But the megaphone is screaming NO INFLATION as nominal and real rates both move higher.

    I don’t see YCC any time soon.


  2. Judd Hirschberg Says:

    Mike, to the megaphone, inflation is showing up everywhere in the bills I pay from grocery to hard assets.

    I have manufacturers in my room who’ve been told by suppliers that they can not guarantee forward pricing for parts, nor will they venture to quote one.

    Supply chain bottlenecks are causing scarcity price rises.

    China is using a strong Yuan to purchase raw materials like “Copper”
    which you so rightly point out.

    Housing prices are exploding in preferred areas with the exception of the big northern industrial cities where the citizenry are over taxed and wishing to escape because it’s no longer safe.

    The safety issue is paramount, taxes are secondary in my view.

    I live in Lincoln Park Chicago and I won’t be for much longer.

    Why live in a city that you can’t enjoy?

    Enjoy the market ride. We’ll see it both ways.

    Surf is up and it’s a great trading environment.

    • Michael Temple Says:

      Hi Judd
      I am a native Chicagoan, and still have family and friends there, too.
      I agree with you.

      It is time to leave Dodge.

      Yes, you are right…..Supply chains everywhere are stressed/overstressed. From steel to aluminum cans and plywood, the cost of “everything” has exploded and very few suppliers can satisfy all their customer demand. Lots of rationing going on.

      Best of luck on your eventual move out of Lincoln Park. Still one of my favorite zoos.

  3. Leslie Philipp Says:

    Pick your start date: LTC, Dot Com Bust, ‘08, Taper Tantrum, and now to Infinity & beyond …

    Moral Hazard has only grown.

    I wonder if what the Fed’s more important “Control” might be is, Credibility?

    • Yra Says:

      Leslie—in the Weber PS piece he discusses the weak forecasting history of central banks—-even Phillip Stevens in Friday’s FT called out the banks for their hubris even as they have gotten so many things wrong over the decades.It is ultimately about credibility which is why GOLD hovers at elevated levels—when Genius failed is not about LTCM but about has been relegated to the consortium of central banks

  4. Sherz Says:

    I hear the galloping of horses…it’s the bond vigilantes. With prices beginning to take off, the bond buyer will be insisting on higher yields. If YCC denies him a fair return, he”ll pass. The buyer of last resort will be the only buyer. Central Bank expanding balance sheets will become unrecognizable. Remember when Fed chairmen said that they would never monetize the debt?
    Meanwhile the Teslas will become more grotesque than ever. Distortions wherever you look. Dr. Copper and black gold continue while yellow gold has the fat man sitting on it.
    The invisible hand suddenly is very visible, in its ugly, arthritic self. Markets no longer serve their function, as Capitalism as a system may be seeing its life being squeezed out of it.
    1913-2021-RIP Federal Reserve. John Pierpont is not resting very well.

  5. Financial Repression Authority Says:

    […] LINK HERE to the Blog Post […]

  6. David Richards Says:

    No, the markets care little about the Fed’s forward guidance as it has no credibility. And treasury auctions have gone poorly lately with foreign buyers long gone.

    Note that rising bond yields combined with a falling currency have traditionally been the classic signals of a financially troubled banana republic. Like the USD and UST’s again today, last week and most of the past year.

    Nobody should bother with the forward guidance nor anything the policymakers in such a place say. Just keep selling any UST or (especially) dollar rallies.

    Snippets from Druckenmiller’s interview this month: “My overriding theme is inflation relative to what the policymakers think … I have a short Treasury position, primarily at the long end … I also have a large position in commodities … And because of our policy response versus Asia, I also have a very, very short dollar position.”

    • Yra Says:

      David–thanks this was a great interview concise and to the point and I keep going back to it —but I find the best Treasury short to be in the BELLY of the curve as BT notes below because of its insane price relative to real inflation numbers—but the curve is just taunting the FED anyway so insanity prevails but David your point of course coalesce with Stanley as you have been there for many MOONS—and i offer you this Mr. Richards—I live in the land where PRACTICE IS THE SOLE CRITERION FOR JUDGING TRUTH—-not the deification of the TWO WHATEVERS

  7. BT Says:

    I welcome the positive real yields now on the 30yr UST. Im a buyer here and bought happily today given my alternatives in the fixed income space. Regardless of how certain anyone is of their thesis- for US based investors, UST serve a role in anyones portfolio. Maybe i am the dumb retail buyer aside from the FED, but TINA only works if TINA. If this bond vigilante run continues, I can get even more real real return on the long end with more purchases. I already have too much overpriced stock.

  8. ShockedToFindGambling Says:

    IMHO, part of the break in LT Treasuries, is due to Credit Concerns.

    If Treasury rates rise sharply, the Treasury will have trouble financing/rolling over the debt…….the FED will have to buy it all so they can rebate the interest back to the Treasury.

    If we go into recession, their will be problems with revenues.

    The only thing that works is keeping the economy going and keeping rates low…..tough to do.

    I think we will see YCC it 10 Year Treasury goes much thru 1.5……FED can’t let rates get away from them and they know it.

  9. Pierre Says:

    I was kind of curious, where would the ST rates be if the Fed wasn’t suppressing them?

    I appreciate the Fed trying to extinguish our debt with a 2% or more inflation target. (at the same time keeping prices elevated)
    Up to now we have not been able to fight fire with fire, unable to extinguish our debt with a debt based instrument. What makes the Fed think we can do it now?
    One method used to put out oil well fires is dynamite. I think as we speak some people are running for cover.

    • Yra Says:

      Pierre–the FED is at war and it doesn’t know it.The losses being suffered in the bond market are knee deep blood and the war is being perpetrated by the global macro titans who are pushing at the weakest point and least resistance–long duration.The FED and all central banks have kept the short end pinned to the floor so many investors have had to increase duration in an effort to find yield.The bond buyers are being crushed by the speculators and the FED is too busy claiming victory as they see rising bond yields as a vote of confidence in their policies.Let’s see what losses the bond funds have taken as the month closes out tomorrow—-YCC to bail out the bond owners

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