Global Macro: Bonds, Silver Strong Ahead of Fed

TheStreet.com

NEW YORK (TheStreet) -- U.S. bonds and silver closed strong on Tuesday, possibly setting up for a move higher ahead of Wednesday's Federal Reserve meeting.

On Wednesday, markets will get commentary from the Federal Reserve, which is expected make no changes to current policy.

The first chart below is of iShares Barclays 20+ Year Treasury Bond .

As I wrote yesterday, defensive sectors such as Consumer Staples Select Sector SPDR have been outperforming recently, partly because low-beta, slow growth companies do well during times of uncertainty.

As investors have rotated away from high-beta companies such as Tesla Motors, they have put funds in companies offering less capital appreciation. Defensive companies with lower growth also tend to offer attractive dividends, which can be enticing when bond yields are declining.

The long-dated Treasury bond broke higher from its bottom range earlier in the month, but has since consolidated tightly. Prices have drifted lower in a holding pattern, but with the Fed's commentary on the horizon, the promise of continued stimulus could be enough to push bond prices higher.

Continued stimulus would further weaken yields and could continue to fuel the equity rally as downside protection provided by the Fed would eliminate some anxiety at our current record highs.

Watch for the language used by the Fed on Wednesday to determine whether it will continue bond purchases into 2014. If the language is dovish, it may be the catalyst for a bond market reversal higher.

The next chart is of iShares Silver Trust . Precious metals have been bid higher recently, as stimulus expectations have been projected further out into 2014. A longer period of time with low interest rates causes investors to hedge inflation risk with precious metals such as gold and silver.

The dollar has similarly trended lower since September, as investors have been forced to switch dollar long bets in the face of continued stimulus.

Silver and gold prices tend to move together, and silver put together a bullish technical set up at Tuesday's close.

Expect bonds and precious metals to push higher if the Fed expresses a dovish tone at Wednesday's meeting.

At the time of publication the author had no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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