So long, quantitative easing. But, it looks like the markets aren’t missing you yet.
According to minutes released by the Federal Reserve this week, the bond-buying stimulus program will likely come to an end by October as long as the economy progresses as expected. That would put the total amount of bonds purchased in the latest round of quantitative easing (“QE3”) at about $1.88 trillion.
Curiously, the yield on the benchmark 10-year Treasury note fell as the Fed began tapering its bond buying beginning last December. With fewer bonds being purchased by the Fed, rates were expected to move higher. That’s because bond yields move in the opposite direction of bond prices.
However, low yields in Europe, geopolitical concerns and uncertainty about the U.S. economy have made Treasury bonds an attractive, safe investment, keeping bond prices relatively high.
“Certainly we’d expect [yields] a little higher,” said Erin Gibbs, equity chief investment officer at S&P Capital IQ. “I think because we’ve seen a lot of conflicting news about unemployment growing—but wage growth down—there’s a lot of uncertainty about when [Fed Chair Janet] Yellen is finally going to raise rates.”
Gibbs believes that when the Fed gets around to raising rates, it will be very slow and steady. “We knew that tapering was going to end in October and that trade was really done in the winter of last year,” she said. “The bond market is thinking it’s going to be an extended period before they finally do raise rates, and it’s going to be very small and very incremental when it happens.”
In the meantime, the yield on the U.S. 10-year note will trade in a range between 2.4 and 2.7 percent, said Ari Wald, head of technical analysis at Oppenheimer & Co. That’s lower than the 3 to 3.5 percent some predicted for rates at the beginning of the year.
“The good news for U.S. debt is that it’s relatively attractive when you compare it to some of the Europe periphery debt that’s traded in-line right now,” said Wald. “It helps keep a ceiling on yields.”
For Wald, that ceiling on yields is at the 200-day moving average, currently around 2.7 percent.
“The bad news is that this is no longer a contrarian bet,” Wald said. “Coming into the year, everyone was expecting rates to go higher. Sure enough they went lower.”
The percent of bond bulls in the market has grown, according to surveys conducted by Consensus Inc. Wald graphed the inverse of the survey data going back four years to show how it has been a contrarian indicator.
“We can see that bond optimism has been on the rise,” said Wald. “It’s not extreme yet and I think we are still holding up. We think we can see some bearish capitulation; 2.4 percent is support.”
Should yields get back down to that level, though, Wald believes there may be a quick reversal as bears capitulate.
“At that point you can see that move higher,” he predicted. “But, until then, I think it’s range-bound.”
To see the full discussion on the U.S. Treasury 10-year note, with Gibbs on the fundamentals and Wald on the technicals, watch the above video.
- Budget, Tax & Economy