Give Me a Two-Handle and a Side of Pain

Our favorite Saturday mornings begin with a double Bacon, Egg & Cheese on a roll, complete with a side of hot sauce and strong coffee. Whatever our weekend warrior plans, or regardless how late we stayed out, the combination inevitably provides the right balance of both comfort and sustenance.

Federal Reserve officials too, wrestle with comfort and sustenance, though perhaps of a slightly headier variety. As Chair Yellen gavels to order their two-day meeting in Washington, which culminates in a policy statement tomorrow at 2pm ET, members from each of the Fedʼs 12 districts will offer regional commentary, anecdotal evidence and plenty of data.

They will also likely discuss coordinated central bank action around the world. The U.S. accounts for nearly a quarter of the global economy, and while U.S. payrolls have risen to a post-crisis high, 24 of the worldʼs central banks have lowered rates this year to combat accelerating deflation in their respective countries. As a result, The Financial Times estimates $4T in sovereign bonds now trade at negative yields, a starkly different scenario from the U.S., where the 10-year note returns 2.06 percent.

Give Me a Two-Handle and a Side of Pain

Yellen & Co. might want to pull away from the pack, but theyʼre stuck. Foreign investors own 47 percent of U.S. Treasury debt according to Deutsche Bank. If they telegraph a rate liftoff for June (even September), bond prices will plummet and alienate global investors.

Even IMF Managing Director Christine Lagarde has gotten involved, laying down a gauntlet of sorts at a conference in Mumbai today “We are perhaps approaching a point where the U.S. will raise rates later this year… even if the process is well managed, the likely volatility in financial markets could give rise to potential stability risks.”

So once again Chair Yellen must walk a tightrope and rely on words like “patient” to soothe anxious investors over anemic returns. We still advocate buying U.S. Treasuries, NOT because we like earning 2.06 percent, but because they represent a significantly better value for global investors RELATIVE to other liquid alternatives like German Bunds and U.K. Gilts… we wonʼt even acknowledge JGBs or the deeply troubled Swiss market.

Tomorrow morningʼs order? Give me a two-handle and a side of pain. Please.