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Investors brace for Treasury bear market
by James Phillipps on Jan 15, 2013 at 09:34
The long vaunted Treasury bear market may already be upon us, with worse to come over the course of the year.
The yield on benchmark 10-year Treasuries moved out to 1.91% last week – the highest level since May last year. The breakout from the trading range of the last five months has been put down to concerns the US Federal Reserve’s commitment to maintaining a loose monetary policy is waning.
The latest set of Federal Open Market Committee (FOMC) minutes from its December meeting revealed an apparent split within the membership. While some advocated the continuation of the asset purchase programme until the end of 2013, others remained in favour without putting a timeframe on the policy.
But others want to either stop buying bonds now or at least end the programme earlier than anticipated.
The minutes said: ‘Several [members] thought that it would probably be appropriate to slow or stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet. One member viewed any additional purchases as unwarranted.’
Gary Dugan, chief investment officer for Asia and the Middle East at Coutts, said: ‘A bear market has potentially broken out in US government bonds, and our favoured response is to continue to rebalance portfolios towards equities.
‘Investors had been happily buying bonds on the basis that the Federal Reserve’s previous communications suggested no tightening of policy until 2015, by which time unemployment might possibly have fallen below 6.5%. However, the latest Fed minutes seem at odds with the view that interest rates will remain low for a long time to come.’
Dugan believes that although in reality the Fed is likely to keep interest rates low for ‘some considerable time’, other forms of monetary loosening are likely to be withdrawn as the economy and labour market improves.
He points out that when the Fed introduced its more accommodative policy after the summer, the economy was in a far weaker position with job creation averaging 66,000 a month in the second quarter, compared to 158,000 in the second half of the year.
‘Fed communications are clearly in a difficult space and we hope Fed board members will use speeches in the coming weeks to add clarity,’ Dugan said.
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