The FOMC has spoken and for the moment they are standing pat. While the market was expecting a $10-$15 billion reduction along with a generally dovish commentary, it got no tapering and a generally dovish commentary. For the moment rates are rallying, equities push to new highs, and the USD is selling off precariously. We think that the move in rates was warranted, given that we had pushed historical averages from a real return and inflation adjusted curve perspective. We, however, feel that the conversation will now move to an October taper discussion as the data had never really warranted an aggressive move by the Fed, but we nevertheless have sold off over 110 bps. Interestingly, the Fed continued to lower its economic projections for the next year, even as it expects to reach its 6.5% unemployment rate threshold in 2015 and be near full employment by 2016. For their commentary to contain concern over the employment market given these expectations, highlights possible structural issues that have been developing during this recovery. Ultimately, we think that the move lower in rates is warranted, but expect that continued tapering talk will keep it range bound near current levels. We view the dovish bent as supportive for risk taking, which has been building over the past few weeks. In particular, the high yield market has seen its average rates fall 20 bps over the past few weeks, while the investment grade market spreads have been stable despite record issuance over the past several weeks. While the Verizon deal has been record setting from many perspectives, issuance from other borrowers has also been strong and a case can be made for another $50-$60 billion before the month is over. With the FOMC meeting in the rear mirror, commentary from Washington will move to the budget and debt ceiling, with the initial forays somewhat discouraging. A last minute resolution is baked into consensus given historical precedence, although a fringe view believes that a government shutdown is not out of the question, a risk that is not reflected in markets. Read the full commentary now.
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