Mike Burnick: Investors have had plenty of market-moving Federal Reserve news to digest this week: Janet Yellen apparently is a shoo-in as the next Fed chief after Larry Summers dropped out of the running, while Ben Bernanke kept monetary policy on hold for now by not tapering quantitative easing (QE).
So what does all of this mean?
For one, elevated volatility in securities prices, as we’ve already seen. But here’s the most important take-away: Don’t get fooled by the knee-jerk reaction in stocks, bonds, commodities and the dollar. On days when key economic news is released, whether it’s a Fed meeting, jobs report or gross domestic product, the initial market reaction is often a head-fake.
It’s best to wait a few days, even a week, to determine if an actual shift in a market trend is under way. That said, I’m going to focus today on one high-profile market that’s overdue for a short-term trend reversal: Treasury bonds.
|What’s the likely effect on bond markets in a non-tapering world?|
Bond Investors Overreact
Borrowers including prospective home buyers, businesses and consumers are already suffering sticker shock as interest rates have surged in recent months. And I believe they’ve risen too far, too fast, and are due for reversal, meaning lower interest rates and higher bond prices.
To put that in perspective, consider that the average rate on a 30-year mortgage jumped to 4.8 percent recently from a low of 3.3 percent in May. That’s a 45 percent increase.
As a rule of thumb, every 1 percentage point increase in home-loan rates translates to a 10 percent drop in housing affordability. And that, of course, has a multiplier effect throughout the economy, reducing consumer spending on cars, at retailers and the like.
That tells me the Fed — with or without Bernanke at the helm — is likely to move slowly on tapering as we learned today cautiously gauging the impact on the economy.
Let’s face it: The Federal Reserve doesn’t need to do tapering, or reduce its bond buying. By talking publicly about a slower pace of bond purchases in June, Bernanke has already sent 10-year Treasury yields soaring.
Investors not only got the message loud and clear, but appear to have over-reacted.
The irony is that the Fed’s expressed intent in launching multiple rounds of QE since 2009 was to hold down long-term interest rates and promote job growth. Instead, interest rates have surged, investors have experienced the biggest bond market selloff since 2004 and banks are cutting thousands of jobs as demand for loans weakens.(...)Click here to continue reading the original ETFDailyNews.com article: What To Make Of Ben Bernanke’s Monetary Policy Move?You are viewing an abbreviated republication of ETF Daily News content. You can find full ETF Daily News articles on (www.etfdailynews.com)
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