Macro Wrap – FOMC and the Bond Market

by Enis January 30, 2013 7:24 am • Commentary

The Fed rate announcement is today, but far more important will be the actual text of the release.  After the last FOMC minutes showed some participants discussing the end of 2013 for a removal of QE measures, market players are especially alert to changes in language that might signal an end to asset purchases.

My personal view is that the Fed won’t act so soon.  They have just instituted new programs in Sept and Dec, and I imagine they want to let the market digest those programs for a bit before pivoting again.

Regardless, the bond market has started to move on that message.  The 5 year weekly chart of TLT, the 20+ maturity Treasury Bond ETF:

5 year weekly chart of TLT, Courtesy of Bloomberg
5 year weekly chart of TLT, Courtesy of Bloomberg


TLT made a new 9 month low yesterday, and major support does not exist until 110.  The 10 year Treasury yield is now above 2% for the first time in months as well.  The bond market’s move is a combination of excitement about better global growth prospects and fewer risks, and concern about the eventual end to the Fed spigot.

However, if there has been one constant to bond market bubble proclamations over the last 3 years, it has been that they have all been wrong.  Risk/reward of holding a 10 year bond yielding 2% looks dismal, but the Japanese 10 year bond yields 0.76%, so financial markets are not always based on simple conclusions.

Most important for today’s meeting will be the overall tone set by the committee.  The market is not expecting drastic change, but the key lies in the nuances of the message.  Expect more market volatility in the second half of this week.

Markets overnight:

  • Asia was strong, again led by Japan up 2%, led by Japanese bank shares benefitting from an improving capital markets environment
  • Europe opened green, and is now down 0.2%.  SPX futures are up 0.1%.
  • The Euro is stronger and the Yen weaker, continuing the trend of the last 3 months.  Commodities are up, led by copper up more than 1%.
  • ADP Employment out at 8:15 am, GDP and Personal Consumption at 8:30 am, and the FOMC decision at 2:15 pm.