Update on Bonds and Fixed Income Strategies

Toward the end of June the bond and equity markets reacted negatively to the expectation that the Federal Reserve would be slowing their bond buying program. Ten-year treasuries have moved from 1.80 percent to 2.95 percent since the taper announcement. (Source: Bloomberg)

The news regarding Syria should have pushed down rates, but the bond market has largely ignored the geopolitical risks and is solely focused on the change in Fed policy.

Many analysts including Goldman Sachs feel that the bond sell-off is starting to get ahead of itself and has gone potentially too far. Analysts expect the Fed to come out this week with information that will provide more clarity about the extent of the bond buying reduction (taper), which could lead to stability of rates in the current range.

With the budget debate and sequester/debt ceiling requiring action by mid-October, we believe the Fed may curb their taper plans to some degree. We expect that the Fed may act in September with a symbolic initial action to demonstrate that their tapering program will be gradual, and that it may offer a clear message of assurance that it will increase the bond buying program in the future if necessary.

We believe a prolonged budget debate would not be favorable for the economy in the short term and could cause increased market volatility. If the Fed provides clear guidance as to their intentions over the next 12 to 24 months, some level of stability could be returned to the markets. Our view remains intact as we see potential volatility through mid-October (debt ceiling, new Fed Chair, Fed policy shifts, budget showdown) and the potential to give way to year-end gains if consumer spending and corporate earnings remain on target.

Additional Factor Monday September 16: The news that Larry Summers has withdrawn his name from consideration for the Chairman of the Federal Reserve has sent equity futures into positive territory and bond rates down overnight. There is certainly no guarantee that Janet Yellen will be the nominee however the news that Summers has withdrawn is moving markets and rates this morning. There was a fear that had he been nominated and confirmed as Fed Chair, Mr. Summers would have quickly wound down the Fed’s bond buying program.

Markets could still move and experience volatility surrounding the Fed Chair nomination, but for now the news of Mr. Summers removing himself from consideration is producing a calming effect.

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