Once upon a time, banks were about lending money and banks business model depended upon the spread or difference of borrowing short and lending long. The greater the differential in the spread of short term and long term lending, the greater the profit. So, it should be noteworthy when the spread begins shrinking. At present, spreads have fallen 65-75% from 2011 peaks…and are rapidly gaining speed to the downside. The chart below shows the spreads based on the 30yr and 10yr Treasury’s minus the 2yr.
Given the recent Fed Funds rate hike only accelerated the spread collapse; if the Federal Reserve does not change course and re-implement QE in short order, the rate inversion and subsequent economic dislocation is just a matter of time. So, what is the Fed talking about regarding raising rates & what game is the Fed playing? QE was never a cure but simply a means to extend and pretend just a bit longer. Could it be the pretending and extending have hit some sort of limit and the Fed fears the next Fed administered “cure” may kill the patient?
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Author: Tyler Durden