You want to know how to freak out a bond trader?
Well, if you’re the chairwoman of the Federal Reserve, utter these words:
“So I, you know, this is the kind of term it's hard to define. But, you know, probably means something on the order of around six months, that type of thing.”
That “type of thing” took traders by surprise and laid a whipping to the ten-year bond yesterday. The yield, which moves inversely to prices, is now trading at the upper end of its recent range.
(Read more: Treasurys flat as investors absorb positive US data)
So did Yellen’s words signal a change in Fed policy, and should bond investors be concerned?
One well known bond watcher says yes.
“Going from near total clarity on policy intention to near total uncertainty should have bond investors concerned,” said David Robin, Managing Director at Newedge. “The shift to qualitative guidance increases the uncertainty surrounding policy path determination. While inflation remains generally low, and will insulate the longer end of the curve from inflation premium, the front end of the curve will have to price in an escalating.”
In plain English, that means shorter-dated bonds could see selling pressure. But according to Robin, that may not be a bad thing for equities.
“For the most part, higher rates overtime are expected and factored in to the decision process, as long as it’s gradual,” said Robin. “Today's stock market rally attests to that to a certain degree. Remember, rates are going higher because the economy is improving. So higher stocks and higher rates are not inconsistent.”
- Investment & Company Information