Fed spikes volatility in bonds

Linking monetary policy to unemployment, inflation drive big fluctuations

Dec 18, 2012 @ 3:08 pm

By Dan Jamieson

federal reserve, economy, bond market, fixed income
+ Zoom

Think volatility in the bond market is a thing of the past? Think again.

Investment strategists agree that the Federal Reserve's historic action last week to link monetary policy to inflation and unemployment targets could cause more volatility in the bond markets.

On Dec. 12, the Fed said that, assuming its inflation forecast for one to two years out is less than 2.5%, it would keep interest rates low until unemployment falls below 6.5%.

The action was an indication that central bank officials are still worried about the state of the economy and would be willing to maintain their current federal funds target rate of zero to 0.25% for as long as needed to see a meaningful jobs recovery.

It's also seen as an effort by Federal Reserve Board Chairman Ben S. Bernanke to offer more guidance about how long the Fed will have to maintain its extraordinary efforts to stimulate a sluggish economy.

Although rates look to remain low for the foreseeable future, the linking of rate policy to economic data might cause more short-term fluctuations in bond prices, analysts said.

The market will tend to react to any new economic data, said Jeff Rosenberg, chief investment strategist of fixed income at BlackRock Inc.

“Any positives will ratchet up expectations” about the Fed raising rates, he said, “and more-negative numbers will push [expectations] back.”

“We will have intraday volatility based on the daily news,” agreed Michael Mata, head of multisector fixed-income strategies at ING Investment Management LLC.

For example, the unemployment rate has fallen to 7.7% from 8.3% since summer, said Robert Tipp, chief investment strategist for Prudential Fixed Income.

By extrapolating that trend, “people could say that the Fed could exit [its zero-rate policy] in a year,” Mr. Tipp said. “Or, if we see data the other way, it could look like the Fed won't stop within five years.”

As certain fixed-income sectors sell off, analysts say investors may have some opportunities to capture attractive yields in an environment that will continue to see rates at historically low levels.

0
Comments

What do you think?

View comments

Recommended for you

Featured video

INTV

Ed Slott: The conversation advisers need to have with spousal IRA beneficiaries

Clients who inherit IRAs from their spouses need to decide whether to remain beneficiaries or do spousal rollovers. One important factor in that decision is their age, according to Ed Slott, founder of Ed Slott's Elite IRA Advisor Group.

Latest news & opinion

Eduardo Repetto to leave Dimensional Fund Advisors

Gerald O'Reilly, currently co-CIO, will take over as co-CEO with David Butler.

Alternative strategies boomed after crisis, but haven't been tested

Because the S&P 500 has outperformed, convincing clients they need protection is a hard sell.

7 ways advisers fixed clients' biggest financial dilemmas

Sometimes it takes creativity, along with knowledge and outside help, to get a client out of a jam.

LPL Financial buys NPH, a broker-dealer network with 3,200 advisers

The deal, part of which is based on the advisers and revenue that eventually will move from NPH, could potentially cost LPL $448 million.

3 things advisers should make sure their clients' children take to college

Advisers can help clients avoid scary and painful situations with kids age 18 and older.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print