Federal Reserve Chairman Ben Bernanke’s announcement that the central bank could slow down its assets purchase program by September triggered a sell-off in the fixed-income markets, pushing yields higher.
The Fed’s move, however, seems to have come a little earlier than anticipated, says Ira Jersey, interest-rate strategist at Credit Suisse Group AG. Asked if he agreed that the economy is good enough to start rolling back some of the QE, Ira answered in the negative.
The Fed’s own forecast says growth and inflation will accelerate in the second half of the year and hence a couple of month’s data is required before reaching any conclusion. One of the reasons why the Fed might be doing this is to pave the way for the next chairperson where chairman Bernanke can take some of the blame if there is an economic slowdown due to the reduction in quantitative easing, he explained.
Asked to explain the notion that if they’d wait for the data to actually improve, it’s already too late, Ira said given how low the levels (of growth) are.
The six-week difference between the July and September (FOMC) meeting would not be significantly different for the economy in 2014. Ultimately though, what was kind of innovative in the Fed’s statement last week was not so much the fact that the Fed’s going to end quantitative easing, because analysts have been anticipating it since January, but the fact they pulled forward their guidance on unemployment hitting the threshold of 6.5 percent to the beginning of 2015 or end of 2014. It was a huge development that scared the markets because all of sudden there was now a potential 2015 hike on the table, which the markets were not pricing in, he noted.
Asked if he expects the sudden jump in yields to continue, Ira said the markets will be very dependent on data going forward. There may be a new range temporarily, but July 5th will be a very illiquid market day given the holiday the day before; it is when the next payrolls number will be released.
If the reading is extremely soft, 10-year Treasuries might rally 10 or 15 basis points, where as if the number is in the 200,000 range, the market can continue with the sell-off up toward 2.75 percent.
Ultimately, the markets will move on numbers over time. The latest jump of 25 basis points or so in yields was due to a lot of hedging in other instruments like Mortgage-backed securities and corporate bonds, and also making room for outflows, Ira observed.
You can watch the video here.