At their September meeting, the Federal Reserve surprised markets by maintaining their program of monthly Treasury and agency MBS purchases. So the taper is again “on hold.” Our economist Robin Anderson looks at the Fed’s decision and examines what it means for the markets.
Posts tagged ‘quantitative easing’
169,000 new jobs in August. Sounds pretty good…unless you were expecting 180,000. Combine that with June and July gains getting revised down by 16,000 and 58,000, respectively…and you get something that falls somewhere between ‘super tepid’ and ‘lackluster.’ So, when the Federal Reserve meets next week, what will they think about jobs numbers and how will that affect their tendency toward tapering?
Year-to-date average monthly payroll gains sit at 180,250. That’s lower than the average in 2012, and more importantly, it’s lower than the rate of 200,000 that some FOMC members would prefer to see before cutting the pace of bond purchases. Of the combined June-July revisions (-74,000), an unusually high amount (over half) came from local government – mostly education. Read more
In a perfect world, a diversified portfolio would have asset classes that are uncorrelated, allowing an investor to maximize return while minimizing risk. As every high yield portfolio manager has probably told you, high yield bonds have had low correlations with other asset classes, and they can offer attractive risk-adjusted returns. This low level of correlation has allowed investors to benefit from allocating to high yield bonds. According to Barclays, monthly high yield bond-return correlations have been negative versus U.S. Treasurys over the past twenty years. Obviously, that correlation statistic includes a time period of declining Treasury rates.
So what have correlations done during the most recent increase in rates?
Despite what feels like a 1.00 (perfectly positive) correlation to rates, high yield bond daily-return correlations to the Barclays U.S. Treasury 5-7 Year Index since May 1 are elevated, but still remain relatively low, only 0.20 (unless otherwise noted, all performance information is as of August 27, 2013). Read more
Mark Carney has really put his stamp of authority on the Bank of England (BoE). After just one month as the BoE’s new governor, he’s already shaking things up. At the latest meeting of the Monetary Policy Committee (MPC), he introduced forward guidance that would have been almost unimaginable under the previous Governor, Mervyn King.
Here’s what Carney’s forward guidance looks like. The MPC intends not to raise their benchmark bank rate from its current level of 0.5% until the unemployment rate falls to a threshold level of 7%. This is subject to three caveats:
- inflation is no higher than 0.5% above the 2% inflation target at the 18-24 month horizon
- medium-term inflation expectations are contained
- and the Financial Policy Committee (FPC) believes that an accommodative monetary policy stance doesn’t pose a risk to financial stability. Read more
The Reserve Bank of Australia must be feeling pressure to provide financial markets with explicit forward guidance on the long-term direction of its interest rate strategy. These days, with central banks all over the world providing markets with forward guidance on rates in an effort to shape market expectations, the RBA is one of the few remaining major central banks to maintain a sense of anticipation at each meeting – rates could just as easily go up as they could go down. Even the European Central Bank has finally backed away from its sacred no “pre-commitment” policy. Check out my previous post on forward guidance here.
Increasingly these days, what was once considered to be “abnormal,” markets are beginning to construe as “normal.” A central bank that doesn’t provide forward guidance is increasingly seen as hawkish (“do they have something to hide?”) and markets tend to react by driving up its bond yields and their respective currency – effectively tightening financial conditions.
In a recent economic commentary (here’s the link), Bob Baur and I examined the pros and cons of the two top candidates to succeed Ben Bernanke as Chairman of the Federal Reserve: Janet Yellen and Larry Summers. Today, I’d like to use this blog post to examine a few different avenues where Yellen and Summers might differ were each to get the Fed’s top job.
The first way I’d look at this would be from their respective statements on Fed policy. Almost everything we’ve heard from Yellen suggests that she’ll be Spider-Man 2 to Bernanke’s Spider-Man…more of the same, still pretty good, but not saddled with the task of having to explain how this all started. Summers is harder to read. Read more
Every summer, Monaco is home to the annual Fund Forum International conference, a high-powered meeting of asset managers and fund selectors. The weather outside the conference is invariably gorgeous, but this year, the climate inside the conference was distinctly chilly. Why? The Fed’s suggestion that the flow of money into the markets in the form of quantitative easing might be coming to an end. This was made abundantly clear in recent market activity, but it was just as obvious with the participants at the Fund Forum. Shoulders were a little more slumped, brows a little more furrowed. Bond managers were downright fractious. Read more