The Fed would prefer not to discuss going negative

Jerome PowellJerome Powell, chair of the US Federal Reserve.

David Lafferty (Natixis) | The sovereign bond market offers a cocktail of low rates with principle losses as rates out the curve gradually rise into next year.

– Central banks have pinned the front end to zero – or lower – but real rates and inflation premiums have some room to rise into the recovery phase – as slow as it may be. Yields will also see some upward pressure when the Fed and other central banks eventually begin to slow QE purchases.

– At this point, the Fed would prefer not to discuss going negative as the overnight market recently priced. Another sell-off or prolonged shutdown might put negative rates on the table, but we’re not there yet.

– Equity markets might love negative Fed rates – at least for a while. However, the economic carnage that would justify negative overnight rates should strike terror into the hearts of long term shareholders.

– Sovereign yields have done nothing to corroborate the 30% rally in stocks because bond investors are skeptical of the macro backdrop or because they believe the Fed will initiate curve controls to cap the long end.