March 15, 2017 - FOMC Interest Rate Decision Analysis
Yellen's Use of the Term 'Gradual' Softens Fed's Third Post-Crisis Hike By The Street
Monetary policy committee members maintained their projection of two more hikes this year, which could take rates to a range of 1.25% to 1.5%.
The Federal Reserve increased short-term interest rates by 25 basis points Wednesday as both inflation and the labor market improve, but the central bank countered speculation that the pace of increases this year might accelerate.
Wednesday's move, only the third hike since the Fed trimmed rates to nearly zero during the 2008 financial crisis, boosted rates to a range of 0.75% to 1%. It stands to benefit banks from JPMorgan Chase (JPM) to Wells Fargo (WFC) , which typically goose interest income by passing on hikes more quickly to borrowers than to depositors.
"Waiting too long to scale back some accommodation could potentially require us to raise rates rapidly sometime down the road, which, in turn, could risk disrupting financial markets and pushing the economy into recession," Fed Chair Janet Yellen said during a news conference after the monetary policy committee's meeting.
Committee members maintained their projection of two more hikes this year, which could take rates to a range of 1.25% to 1.5%, tamping down speculation that more rapid economic gains might prompt it to try for four increases.
"The Fed had the opportunity to be more hawkish today if they wanted to, and they weren't," Mike Baele, U.S. Bank Private Client Reserve managing director, said in a phone interview.
"The market is breathing a little bit of a sigh of relief," he added. "That helps explain why stocks move modestly higher."
The S&P 500 rose 0.84%, the Dow Jones Industrial Average increased 0.54%, and the Nasdaq moved higher by 0.74%.
Yellen suggested that the pace of hikes would remain "gradual," though she didn't specify exactly what number per year that might mean. Over a decade ago, "when rates were raised at every meeting, I think people thought that was a gradual pace, measured pace, and we're certainly not envisioning something like that," she said.
While the yield on the 2-year Treasury bond declined from 1.38% to 1.3% Wednesday, Bryce Doty, senior portfolio manager at Sit Investment Associates, said further hikes during 2017 and an additional three in 2018 will likely push yields up. Investors typically seek a bigger premium for notes when they expect rates on later issuances to be higher.
"I would be a contrarian at this point," said Doty, who's responsible for $7 billion in taxable bonds. "I would sell bonds after looking at today's market reaction with bond prices going up and yields going down. Seems counter-intuitive. I understand the relief rally that has pushed bond prices up and bond yield down, but I think it's going to be short-lived."
The Fed's decision was underpinned in part by an improving labor market, reflected in a government report last week that showed U.S. employers adding 235,000 positions during February, while the unemployment rate fell to 4.7% and wages grew.
Personal consumption expenditures, or PCE, a gauge of prices that consumer pay for goods and services, rose 1.9% in January, closer to the Fed's inflation target of 2%.
The central bank didn't signal any change Wednesday on the handling of its $4.5 trillion balance sheet, noting that it will continue to roll maturing investments into new securities.
The Fed now expects median economic growth of 2.1% this year, with the median unemployment rate dropping as low as 4.5% and inflation holding steady at 1.9%.
While the timing and amount of government spending that President Donald Trump has promised as part of efforts to boost the economy has yet to be finalized, Baele said the Fed clearly didn't see a need to wait for further details.
"The conventional wisdom a month ago was that the Fed wasn't inclined to move until it had a clear vision of what the fiscal stimulus might be," Baele said. "The Fed is basically saying that the data has been good enough that we think it's appropriate to move regardless."
Minneapolis Fed President Neel Kashkari was the only committee member to vote against Wednesday's shift, preferring to leave rates unchanged. The monetary policy committee's next meeting will begin May 2.
January 25, 2017 - Bond Market Won't Get Fooled Again
How Bond Investors Were Fooled Twice By Elliottwave International
The Commercials and Large Speculators are routinely on the opposite sides of trades.
Most investors, including large groups of professional money managers, extrapolate financial trends into the future. So they're often completely caught off guard when a trend changes.
The history of financial markets is full of such instances.
Right now, let's focus on bonds. As you look at this chart from our July 11, 2016 Short Term Update, keep in mind that Large Speculators represent the trend followers who are usually caught off guard at important price junctures. Conversely, the Commercials routinely take the opposite side of the trade.
The sentiment backdrop for [30-year U.S T-bond prices] is strongly bearish for prices. We continue to point out the extremes that remain in place in the Commitment of Traders data (shown above). In overnight trading last night, prices nudged up to 177^11.0 and then reversed lower during the day session. A decline below 173^15.0 would indicate that prices have reversed their rising trend and a larger selloff is underway.
The high of 177^11.0 remained intact, and as you probably know, prices careened below 173^15.0 as a large selloff took bonds sharply lower and interest rates rose.
Fast forward five months.
Our Dec. 5, 2016 Short Term Update showed subscribers that the price and sentiment picture had changed:
Tonight's chart shows the weekly pattern in [30-year U.S. T-bond futures], which have made a low at 148^11.0 so far (Dec. 1). ... After reaching a 21-year record extreme in conjunction with the wave (5) July peak, both the Large Speculators and Commercials have completely reversed their positions. ... A countertrend rally is fast approaching.
Just 10 days later, on Dec. 15, 30-year U.S. Treasury bond prices declined to 147^04.0, and since then, the expected rally has started.
This Jan. 6, 2017 Short Term Update chart tells the story:
U.S. 30-year T-bond futures pushed to 153^09.0 early this morning, just shy of filling the open gap at 153^25.0 from November 28.
Investors should now be keeping a close watch on the evolving market action. We suggest focusing on the Elliott wave price pattern and time-tested sentiment measures.
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What Are Bond Investments
Governments and companies may issue bonds to finance operations. Most companies can borrow from banks, but view direct borrowing from a bank as more restrictive and expensive than selling debt on the open market through a bond issue. There are different kind of bond investments issued from governments, corporations.
A company can issue bonds just as it can issue stock. Large corporations have a lot of flexibility as to how much debt they can issue: the limit is whatever the market will bear. Generally, a short-term corporate bond has a maturity of less than five years, intermediate is five to 12 years and long term is more than 12 years.
A convertible bond may be redeemed for a predetermined amount of the company's equity at certain times during its life, usually at the discretion of the bondholder. Convertibles are sometimes called "CVs."
Callable bonds, also known as "redeemable bonds," can be redeemed by the issuer prior to maturity. Usually a premium is paid to the bond owner when the bond is called.
Term bonds are bonds from the same issue that share the same maturity dates. Term bonds that have a call feature can be redeemed at an earlier date than the other issued bonds. A call feature, or call provision, is an agreement that bond issuers make with buyers. This agreement is called an "indenture," which is the schedule and the price of redemptions, plus the maturity dates.
An amortized bond is a financial certificate that has been reduced in value for records on accounting statements. An amortized bond is treated as an asset, with the discount amount being amortized to interest expense over the life of the bond. If a bond is issued at a discount - that is, offered for sale below its par (face value) - the discount must either be treated as an expense or amortized as an asset.
Issued by a corporation during a restructuring phase, an adjustment bond is given to the bondholders of an outstanding bond issue prior to the restructuring. The debt obligation is consolidated and transferred from the outstanding bond issue to the adjustment bond. This process is effectively a recapitalization of the company's outstanding debt obligations, which is accomplished by adjusting the terms (such as interest rates and lengths to maturity) to increase the likelihood that the company will be able to meet its obligations.
A junk bond,also known as a "high-yield bond" or "speculative bond," is a bond rated "BB" or lower because of its high default risk. Junk bonds typically offer interest rates three to four percentage points higher than safer government issues.
Angel bonds are investment-grade bonds that pay a lower interest rate because of the issuing company's high credit rating. Angel bonds are the opposite of fallen angels, which are bonds that have been given a "junk" rating and are therefore much more risky.
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