Marvin Loh – Managing Director, BNY Mellon Capital Markets, LLC
It’s been a week since the “surprise” Fed move that we did not necessarily find overly surprising. Given that many asset classes were trending higher going into the late taper prognostications, there was clearly a difference of opinions as to what a small taper and a corresponding dovish forward outlook should constitute in terms of asset valuations. What we have seen is a normalization to those views, with some riskier, but more dearly valued assets flat over the past week, reversing their initial euphoria after last Wednesday’s announcement. In contrast, the overly bearish view that bond investors have had is reversing in a sustained and accelerating drop in yields. Futures markets in particular have moved out their rate tightening expectations to mid-2015 from late 2014, more consistent with Fed guidance. The Fed will continue to struggle with its mixed signals, as its low for long prognostications go beyond their full employment forecasts, which is creating longer term inflation expectations, and therefore maligning the longer end of the curve. As we are of the view that nothing was particularly surprising, we continue to expect a tapering event before the end of the year, mainly because the Fed has wanted to taper due to efficacy and bubble concerns in our view. While the low for long statement has helped lower rates, the impending taper will keep them from returning to pre “taper out of the bottle” levels from early summer. Theoretically supportive to yields would be the impending government shutdown, which is a much larger reality than we had thought possible a few weeks ago. There is limited historical precedence for a shutdown of the government and we need to go back to 1995/1996 for something to grab hold of. In that instance, yields fell 30-40 bps, although they started in the 6% level. Risk appetite remained strong, however, with the S&P and other developed market bourses also posting gains. We have included a guest Washington writer in our piece and encourage you to get to his insightful synopsis. Read the full commentary now.
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