In case you hadn’t noticed, the yield on the benchmark 10-year U.S. Treasury note is this close to hitting the psychologically important 3% level. Is this the sign of still higher rates to come, or another buying opportunity, meaning rates are going to fall back again?
While most of the market seemed not to notice, seeing as it was fixated on corporate earnings and what’s going on in the tech sector, the yield on the T-note surged by 14 basis points last week to close Friday at 2.96%. That’s up nearly 25 bps since the beginning of this month and 55 bps year to date. It’s also the highest level since the beginning of 2014.
If you recall, we got close to hitting 3% two months ago, when the yield spiked to 2.95% on February 21, surging 25 bps in just two weeks before retreating quickly back to about 2.80% by the end of the month. The note then traded in a fairly narrow band between 2.80% and 2.90% over the next month before dropping sharply to 2.73% at the end of March and early April, after which it surged to Friday’s level.
Are we going to repeat the pattern of late February, meaning that this represents a buying opportuning in the Treasury market, or is this the signal that we are going to finally blow past 3% following February’s false start?
I’m starting to believe that we are now about to break out of tempting the 3% barrier and blowing past it. While the U.S. economy looks like it may have stalled a bit in the first quarter – we’ll know more on Friday when the Commerce Department releases its “flash” GDP estimate – growth beyond that looks better. The consensus forecast is calling for a reduction in annualized GDP growth to 2%, down from the previous quarter’s 2.9% rate. The Atlanta Fed’s GDP Now forecasting tool is also calling for 2.0% growth, but the New York Fed’s Nowcasting Report pegs it as a much higher 2.9% rate, unchanged from the prior quarter.
But whether it’s 2.0% or 2.9% or somewhere in between, the American economy hasn’t shown this sustained level of growth in some time. Assuming Q1 GDP comes in at 2% or more, that would mark four straight quarters of 2%-plus growth. We haven’t seen that since 2014.
But it was a different world back then. The Federal Reserve was still keeping the federal funds rate at or near 0% and maintaining its mammoth bond portfolio at $4.5 trillion, keeping a lid on long-term interest rates. Bonds don’t have that protection anymore. If anything, I’m more surprised that the 10-year hasn’t blown past 3% – and stayed there – long before now.
This week, then, should be an interesting one in determining the future of long-term bond yields, especially after Friday morning’s GDP release.
Wells Fargo’s Latest Punishment
Last October in this space I wrote that I believed that Wells Fargo warranted at least a $1 billion fine for its various consumer banking misdeeds. I, therefore, felt vindicated by last Friday’s decision – leaked several days earlier to Reuters – by the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency to each hit the bank with $500 million in penalties. While the amount I predicated was spot on – thank you, thank you – I was wrong on which of the bank’s regulators would do the job. I had called on the Fed to do that. Instead, as one of Janet Yellen’s last acts as Fed chair, the central bank decided instead to force the bank to hold its total assets to below its current level of just below $2 trillion.
I think most people – probably including some at Wells Fargo – don’t fully know or understand what the Fed’s unique penalty actually entails in how the bank operates. But a $1 billion fine sure will get people’s attention. I wonder if it’s now enough to get the bank’s attention.
While $1 billion is certainly a lot of money, it’s not a whole lot when compared to the amount a giant bank like Wells makes. Last year Wells reported net income of a little more than $22 billion. In this year’s first quarter, it made a little less than $6 billion, indicating it’s on track to make about $24 billion this year. That works out to about $500 million a week, which would mean that last week’s CFPB-OCC action will set the bank back about two weeks’ profit. Is that a big enough penalty to finally reform itself?
Remember, following the disclosure of the bank’s phony accounts scandal back in 2016 – when it got a slap on the wrist from the CFPB – one relatively minor scandal after another followed – auto loans, mortgage rate-locks, etc. Who knows if more bad news is going to dribble out.
According to American Banker, there is more. The SEC and the Justice Department are looking into the bank’s wealth management unit selling inappropriate products to its clients. The government is also looking into possible improprieties in foreign exchange trading involving one of its big corporate clients.
So this story is far from over.
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INO.com Contributor - Fed & Interest Rates
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.