Bond bulls that have been suffering at the hands of a recent spike in Treasury yields may get some relief Monday when bond markets digest news that former Treasury Secretary Larry Summers has withdrawn his name from consideration to be the next chairman of the Federal Reserve.
Since late May when the Fed first hinted that tapering of its $85 billion-per-month bond-buying activities was a legitimate near-term possibility, the yield on 10-year Treasuries has nearly doubled. That scenario has led to speculation that a nearly 30-year bull market in bonds is nearing an end. Notably, investors have not been shy about pulling money from bond funds. [Should You Still Desire Bond ETFs in Your Portfolio?]
In the past three months, the iShares 20+ Year Treasury Bond ETF (TLT) has lost 8.3% while the Vanguard Extended Duration Treasury ETF (EDV) plunged 12.6%. August was a brutal month for ETF outflows, but bond flows were particularly hard hit. Last month, investors pulled $6.5 billion from bond funds with the iShares 3-7 Year Treasury Bond ETF (IEI) the second-worst ETF in terms of outflows behind the SPDR S&P 500 (SPY). [Outflows Show Bond Weakness Sinking in With Investors]
Summers’s withdrawal could bring relief to beleaguered bond bulls. The former president of Harvard was viewed by many market observers as President Obama’s likely choice over Fed Vice Chairwoman Janet Yellen, although Yellen was widely supported in some circles. A group of over 350 economists voiced their support for Yellen in a recent letter to the President. Twenty Senate Democrats have signed a letter urging Obama to nominate Yellen, who would be the first-ever woman to lead the U.S. central bank, if nominated and confirmed, according to Reuters.
“Earlier today, I spoke with Larry Summers and accepted his decision to withdraw his name from consideration for Chairman of the Federal Reserve. Larry was a critical member of my team as we faced down the worst economic crisis since the Great Depression, and it was in no small part because of his expertise, wisdom, and leadership that we wrestled the economy back to growth and made the kind of progress we are seeing today,” said the President in a statement released by the White House on Sunday.
News that Summers is no long consideration to replace Ben Bernanke as Fed chairman elicited plenty of reaction from noted market participants. PIMCO’s Bill Gross said: “Summers’s exit makes Monday a huge day for curve/risk on trades. Treasury 5/30 curve may steepen by 10. Stocks should do very well.” Gross made the comments via PIMCO’s Twitter account.
Markets are already giving an investors a glimpse of what to expect on Monday. S&P 500 futures surged 1.14% as of 7:30 PM Eastern time Sunday while the U.S. Dollar Index was lower by half a percent. Ten-year Treasury futures rose a full point, a move not often seen during Asian trading.
Should Obama go with Yellen as his choice to lead the Fed, that could assuage skittish investors that have moved out of asset classes like bonds and gold due to the combination of Fed tapering and Summers possibly leading the Fed. Yellen is believed to have a more dovish view of monetary policy than Summers. Gold futures for December delivery were up at 1.47% in Asian trading at this writing.
iShares 20+ Year Treasury Bond ETF
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of SPY and TLT.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
- Budget, Tax & Economy
- Larry Summers
- Janet Yellen
- Federal Reserve