You are on page 1of 4

Leveling the Playing Field March 24, 2014 _______________________________________________________________________ The only thing better than watching Duke

lose to a 14 seed is reminiscing about Duke losing to a 15 seed two years ago! Unfortunately, I cant call any school that matriculated Nancy Grace a lovable underdog. But hope you enjoy the rest of the tournament Dukies! Like Duke, rates had a rough week, jumping up 10-15bps across the curve. The 10yr Treasury started the week at 2.65% and ended at 2.75%, briefly touching 2.80% before retracing. The biggest jump occurred in five years, which if you want to impress your friends you can call the belly of the curve. And we have Yellens first FOMC meeting Q&A to thank for that. Turns out Yellen. Speaks. Very. Slowly. And. Is. Painful. To. Listen. To. I think she might come across better through tweets, so we pulled up her fake twitter account to see what she was tweeting during her statement on Wednesday. @newsheriffintown: the FOMC continues to expect inflation to move gradually back towards its objective @newsheriffintown: inflation expectations appear to be well anchored above current inflation rates which will pull inflation higher @newsheriffintown: #twopercent @newsheriffintown: inflation is lagging indicator @newsheriffintown: #goodtobeboss @newsheriffintown: why are rates moving higher while I talk? lol @newsheriffintown: FOMC economic projections same today as in December @newsheriffintown: change in guidance on rates does not indicate a change in policy @newsheriffintown: #nohikesonthehorizon

@newsheriffintown: only 6 year olds say dot more than me @newsheriffintown: median FF forecast is 1.00% end of 2015 and 2.0% end of 2016 @newsheriffintown: wow, look at that 5 year Treasury go! #unintendedconsequences @newsheriffintown: tapering $10B a month will continue, QE4EVA is OVA @newsheriffintown: gotta fill out my bracket, think its Dukes year. #fedforecastsalwayswrong @newsheriffintown: note to self, remind Kocherlakota that if he ever wants out of Minneapolis, he better start playing ball @newsheriffintown: here a dot there a dot everywhere a dot dot... @newsheriffintown: considerable period of time means six months. #youdothemath @newsheriffintown: in case math isnt your strong suit, that means we might hike in spring of 2015. @newsheriffintown: whenever I talk, rates go up. #iamarategod!!! @newsheriffintown: bummer, stocks down. Guess Ben is still king of equities. lmao @newsheriffintown: when I say financial stability, you say S&P! @newsheriffintown: Financial stability! S&P! @newsheriffintown: wonder if markets will settle down before my next speech on March 31? @newsheriffintown: may need to get some of the other guys to help calm markets next week, not sure we can wait until the 31st @newsheriffintown: hope you like snow @kocherlakota @newsheriffintown: dissent on dissenters, dissent on @newsheriffintown: bye bye belly trades @newsheriffintown: @BLS, go ahead with the 6.4% UR print

@newsheriffintown: bond markets are more sensitive than a teenage girl! @newsheriffintown: @helicopterben - much respect, this is hard! @newsheriffintown: RT if you want me to drop the mic when Im done @newsheriffintown: Im out, tweet at ya in six weeks

I suspect Yellen was surprised a bit by the market reaction. She stressed repeated that nothing has changed in the collective mind of the FOMC over the last three months, and yet markets treated her statements like a hike is in the cards within 12 months. In particular, her reference that a considerable period of time could mean as little as six months forced a possible hike to shift expectations. Markets concluded that if QE ends later this year, just add 6 months and a hike could come spring 2015. The five year part of the curve got hammered the hardest. The front end (two years and less) still benefit from FF being at 0% through at least this time next year. And the long end (10 and 30yr) had already priced in hikes once tapering was put on the table. Will five year rates come back down? Doubtful. Even if Yellen clarifies her statement, its hard to put that genie back in the bottle and markets are going to price in a possible hike in the spring of 2015. Heres the thing - we disagree with this assessment. The Fed is known for being overly optimistic in its forecasts, so lets assume the economy doesnt rebound as quickly as the Fed expects. Over time, rate hikes will gradually be pushed back as positive economic signs come in slower than expected. We still the first hike is more likely 18-24 months away, but it doesnt really matter what we think. This week brings us numerous FOMC speakers who will try to clarify Yellens statement last week. We dont expect any significant backtracking. They will probably focus on the continued pace of tapering at $10B/month and that any rate hikes will come well after that. They will reiterate the Feds dependence on the health of the recovery, improvements in labor markets, 2% inflation, and financial stability (read: S&P). Five year rates are back to the middle of their three month average, so the pain wasnt as bad as it could have been. Still, it would seem the ship has sailed and we will experience a significant drops only if something dramatic occurs. This could come in the form of a

crisis, a reversal in the economic recovery, change in Fed communication, etc. It does not feel like it could come in the form of a momentum swing just from trading swings.

Generally, this material is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. Your receipt of this material does not create a client relationship with us and we are not acting as fiduciary or advisory capacity to you by providing the information herein. All market prices, data and other information are not warranted as to completeness or accuracy and are subject to change without notice. This material may contain information that is privileged, confidential, legally privileged, and/or exempt from disclosure under applicable law. Though the information herein may discuss certain legal and tax aspects of financial instruments, Pensford Financial Group, LLC does not provide legal or tax advice. The contents herein are the copyright material of Pensford Financial Group, LLC and shall not be copied, reproduced, or redistributed without the express written permission of Pensford Financial Group, LLC.

You might also like