gold, page-42232

"Usually in a "normal" bond market where the participants are made up of everyone except Feds, I can understand the ebbs and flows of the speculation regarding IR and so forth but this time we have a party that can jack up yields when it deem it is safe to do so just like when it thinks the yield should be kept artificially low for 10 years."

I must confess that I am far from being a bond market expert. So, what follows maybe controversial to say the least.

First, to my understanding the FED is not selling bonds in the market directly, but asking for Treasury to redeem the ones in the Fed's portfolio that are maturing. Since Treasury does not have the money it must be borrowing such money through the issuance of new bonds. I believe that this is more profitable for the FED than the alternative of selling bonds directly into the bond market at a discount.

Whatever the way, the overall stock of bonds is suppose to stay the same while money is being pumped out of circulation. That is, that the Fed with this type of intervention is reducing the money supply and ipso facto putting pressure upon the federal funds rate, a rate for which the FED sets a target. At the moment such target seems to be, if I am not mistaken, anything between 1.25 and 1.50%. This rate is what forms the base for all interest rates as long term interest rates are not more than this rate after having been adjusted for various risks by adding to it a spread. Although, central banks do control the rate they seem not to control the spread. If you look at QE what they were trying to do with it was to lower the spread as much as possible.

If the bond market believes that the FED has set the fed funds rate too low, expectations of future inflation increase, which means long-term interest rates increase relative to short-term interest rates – the yield curve steepens.

If the market believes that the FED has set the fed funds rate too high, the opposite happens, and long-term interest rates decrease relative to short-term interest rates – the yield curve flattens.
Normal yield curve

"From the post-Great Depression era to the present, the yield curve has usually been "normal" meaning that yields rise as maturity lengthens (i.e., the slope of the yield curve is positive). This positive slope reflects investor expectations for the economy to grow in the future and, importantly, for this growth to be associated with a greater expectation that inflation will rise in the future rather than fall. This expectation of higher inflation leads to expectations that the central bank will tighten monetary policy by raising short-term interest rates in the future to slow economic growth and dampen inflationary pressure. It also creates a need for a risk premium associated with the uncertainty about the future rate of inflation and the risk this poses to the future value of cash flows. Investors price these risks into the yield curve by demanding higher yields for maturities further into the future. In a positively sloped yield curve, lenders profit from the passage of time since yields decrease as bonds get closer to maturity (as yield decreases, price increases); this is known as rolldown and is a significant component of profit in fixed-income investing (i.e., buying and selling, not necessarily holding to maturity), particularly if the investing is leveraged.^[""

Second, who told you that the yield was kept artificially low for 10 years? If that was the case then we should be swimming by now in a sea of inflation. In mainstream economics there is a concept called natural rate of interest, which accidentally is a concept borrowed from the Austrian School of Economics.

"The natural rate of interest, also called the long-run equilibrium interest rate or neutral real rate, is the rate that would keep the economy operating at full employment and stable inflation."

Now, the problem is that for lots of mainstream economists this rate has fallen, leading to the core conclusion that currently low interest rates are not mainly the result of Fed policy.

https://www.diw.de/en/diw_01.c.5511..._rate_of_interest_and_secular_stagnation.html