The Buzz

All markets and investing news all the time

Don't freak out about the Fed

September 15, 2014: 1:13 PM ET

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.

It looks like the normally non-emotional bond market is throwing a little hissy fit.

The reason? Investors are worried that the Federal Reserve might finally shut off the low interest rate policy that's been resuscitating the American economy for nearly six years.

For evidence of this minor panic attack, look no further than the yield on the benchmark 10 Year U.S. Treasury. It's shot up in the past few weeks in anticipation of the Fed's next policy statement, a new round of economic projections and a press conference from Fed chair Janet Yellen. That's all happening on Wednesday afternoon.

But is it really last call for stimulus? Not so fast.

Related: Investors hope the Fed doesn't fumble on interest rates

Yes, the Fed is likely to announce Wednesday that it is once again cutting back on its monthly bond purchase program.

And quantitative easing, or QE for short, is likely to be done for good following the October meeting.

This means financial journalists and economists can finally stop using the word taper unless we're referring to the length of pants ... or Ben Bernanke's beard. Hallelujah!

But even though the Fed may talk about improvements in the U.S. economy -- despite the weak jobs report for August -- it is doubtful that the central bank will hint that it is getting ready to raise its key short-term rate anytime soon.

That rate has been held near zero since December 2008. According to the federal funds futures (remember when we all used to be obsessed with them?) on the Chicago Mercantile Exchange, investors aren't anticipating the first rate hike until the July 2015 Fed meeting at the earliest.

Related: Whoops! Job recovery lost steam in August

Brian Battle, director of trading at Performance Trust Capital Partners, said the recent move higher in Treasury yields is more about a return to normalcy than anything else. At 2.6%, yields remain lower than where they started the year.

That's a bit of a disconnect since rates often move much higher at a time when the market is expecting the Fed to put on its rate hiking boots soon. In fact, many experts thought bond yields would climb sharply in 2014. The rationale was that bonds were overvalued and investors would dump them in favor of stocks.

But Battle also points out that U.S. bond yields are still substantially higher than those for other developed nations, most notably Japan, France and Germany.

Much of that is due to the recent strength of the dollar versus the euro and yen.

And he thinks that as long as investors around the globe are flocking to the dollar, that will lead to more buying of U.S. bonds. Since bond yields move in the opposite direction of prices, these bond purchases will keep a lid on how high rates can go ... no matter what the Fed does.

Related: The U.S. dollar is super strong now

Battle said it's hard to imagine how the 10 Year yield will move much higher than 3% unless the Fed signals it will raise rates sooner than the summer or fall of 2015.

He added that investors often forget that the Fed is still likely to keep reinvesting the proceeds from all the bonds in its portfolio that are maturing. In other words, the Fed is not going to become a seller of bonds yet. It's just not going to buy newly issued ones.

What does this ultimately mean for the market? Bond yields probably aren't going to spike that much higher. That's probably good news for stocks, which have rallied in large part because of historically low rates.

And it may also be good news for consumers too. Mortgage rates are likely to remain relatively affordable.

So even though the bond market (and stock market for that matter) has been a bit antsy lately, you probably shouldn't fear the Fed. Yellen is not pulling away the proverbial punchbowl just yet.

  • Boring bonds beat sexy stocks. Here's why

    The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.

    Bonds are supposed to be for conservative investors who are not willing to take on a lot of risk and don't get freaked out by the daily market headlines. Professional fixed-income investors are data wonks MORE

    - Jul 31, 2014 1:39 PM ET
  • The 4 biggest mistakes investors are making

    Everyone wants to know when the stock market is going to tank -- and how high it's going to go just before it does. It would make getting rich a lot easier.

    Even Wall Street experts don't know exactly what's ahead in the short run. But what they do know is how to position your investments to make the most money over time.

    We talked to several strategists. And here are MORE

    - Jul 24, 2014 7:38 AM ET
  • 5 reasons why the market won't crash

    The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.

    There has been a lot of talk about how this bull market is starting to look like 2007, 2000 or -- gasp! – 1929. Forget a 10% correction. The market is destined for a crash!

    But MORE

    - Jul 22, 2014 1:23 PM ET
  • Stop selling! Stocks are STILL your best bet

    The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.

    Even though the S&P 500 is not too far from its all-time high, it's been a reluctant rally. Investors are still nervous.

    How do I know this? Well, the CNNMoney Fear & Greed Index continues to MORE

    - May 22, 2014 1:42 PM ET
    Posted in: , , , ,
  • Investors are getting out of U.S. stocks

    Stocks may be near record highs, but investors are getting out.

    New data released Wednesday show investors have slashed their exposure to U.S. stocks in recent weeks, choosing instead to pile into bonds or simply hold cash.

    Many are still fearful of another major drop in the stock market, and they aren't sure how to read the current conditions. It's a peculiar period in the market with tumbling small-cap stocks, diminished volatility and low interest MORE

    - May 22, 2014 6:37 AM ET
  • Bond king Bill Gross loves money...and cats

    What do cats and bonds have in common?

    Not much, but that doesn't stop Bill Gross from dedicating his latest monthly investment outlook to his recently deceased feline companion.

    The letter is titled "Bob," in honor of the Gross family's Maine Coon "Kitty," which passed away last week.

    By the way, Gross is the chief investment officer at Pimco, the world's largest bond fund, which has nearly $2 trillion in assets under management.

    Granted, MORE

    - Apr 3, 2014 5:38 PM ET
    Posted in: , , ,
  • Morningstar worried about Pimco corporate culture

    Pimco's corporate culture has suffered since the giant bond fund lost one of its top leaders, according to a report issued Tuesday.

    Morningstar, an influential investment research firm in Chicago, said that the resignation of CEO Mohamed El-Erian in January raised "a higher degree of uncertainty" about the world's largest bond manager.

    Morningstar did not change the ratings on any of Pimco's funds though. Morningstar rates funds via stars and they are MORE

    - Mar 18, 2014 3:44 PM ET
  • Puerto Rico to raise $3 billion in bond sale

    Puerto Rico plans to sell $3 billion in bonds Tuesday, as the Caribbean island struggles to shore up its finances.

    The sale of tax-free, general obligation bonds would be the first in two years for Puerto Rico and comes after the three main credit rating agencies cut the commonwealth's rating to junk in February.

    The final price has yet to be announced, but analysts say the bonds will come with an 8% MORE

    - Mar 11, 2014 12:44 PM ET
  • Bill Gross compares investors to falcons

    Leave it to Bill Gross to use the falcon and the falconer from William Butler Yeats' "The Second Coming" to describe investors and central bankers.

    In his latest monthly investment outlook, Pimco's founder and chief investment officer used the first three lines of the 1919 poem to introduce how his firm's investment process works.

    "Yeats describes a falcon, which in this metaphorical context should be assumed to be the investors, 'turning and turning in MORE

    - Mar 4, 2014 11:38 AM ET
Fear & Greed
Sponsored by

To view my watchlist

Not a member yet?

Sign up now for a free account
Stupid Stock Move of the Day
#StupidStock Move of the Day! $URBN up 6% after awful earnings this week? Dead offensive T-shirt bounce?
Powered by WordPress.com VIP.
Follow

Get every new post delivered to your Inbox.

Join 242 other followers