The Buzz

All markets and investing news all the time
 comments

Don't freak out about the Fed

By 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.

Posted in: , , , ,
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! Yes, Urban Outfitters may be finally turnings things around. But $URBN up 17%? Seems a bit excessive, no?
Most Popular
Can Chipotle keep momentum with quesadillas and milkshakes?
 
Take that, America. Europe's tariffs take effect
 
Hispanics are climbing the social mobility ladder faster than blacks
 
Corey Lewandowski dropped by speakers bureau after 'womp womp' comment
 
Can Starbucks be fixed?
 
Latest Buzz Videos
See all videos
Powered by WordPress.com VIP.