Yields ended the week lower, on a late week rally in Treasuries. Disappointing earnings and yet another very tame inflation report kept investors willing to accept record low yields in exchange for safety. The yield on the two year traded has been cut in half since early April, and trades at .585%, an all time low yield for the security. The ten-year yield has fallen 105 basis points over the same period, 11 basis points just in that past two sessions. Credit remained strong despite the selloff in stocks in Friday’s trading.

A watered down version of the Financial Regulation bill passed the Senate this week, and will head to President for signing next week. The restrictions for proprietary trading and banks who invest their own money in their hedge funds that were in earlier versions of the bill didn’t make it into the final version, and the market viewed that as a plus. But the vagueness of the wording however leaves much to the imagination in terms of actual consequences of the legislation. The bill assigns additional authority to the Federal Reserve to oversee large non-bank financial institution, like large hedge funds. It also creates the Financial Stability Council, which the Fed is a member of along with the SEC and FDIC, to further broaden the scope and increase the power of financial regulation. This is all of course aimed at trying to avoid another financial crisis, but ignores so many of real causes.

It adds more regulation on top of existing rules that were for the most part ignored in the past. The massively flawed logic is that making it bigger will forever make it better. Financial institutions will always be drawn to taking risk. Risk is necessary for a financial system to be successful, the same goes for investing, without risk there is no return. If financial institutions are unable to manage the risks they take, what makes regulators more able? Regulation often drives private sector decisions in the wrong direction and makes matters worse. Instead of adding bureaucracy and more layers of watchdogs policy makers should concentrate more on what they can control. Monetary policy makers have throughout their history created recessions by taking away the stimulus used to fight the previous downturn. The current cycle is no different. We would all be better off if policy makers would concentrate more on creating an environment where the rules are known and risk can be managed properly by those taking the risk, instead of the environment where never ending ZIRP rules.

Have a great weekend.