We Don't See a Change in Bernanke's Policy Stance

BOND STRATEGIST: In addition to the strength or weakness of economic and unemployment metrics in the second half of this year, technical factors in the bond market may force the Fed's hand to begin tapering

Dave Sekera, CFA 17 July, 2013 | 5:31PM

The average spread in the Morningstar Corporate Bond Index rallied more than 12 basis points last Thursday to +143. This rally was in response to Federal Reserve chairman Ben Bernanke's assertion that he expected the Fed would continue its highly accommodative policy for the foreseeable future. 

While the media hype sent the markets higher, we don't think there is any substantive change in his policy stance since the Q&A session following the Federal Open Market Committee meeting June 19. We think Bernanke has been crystal clear that the Fed would begin to taper asset purchases as early as this autumn and end all purchases by next summer if the economy and the unemployment rate develop as the Federal Open Market Committee expects. According to the meeting minutes, it appears that the opinion to begin tapering the asset-purchase programme sooner rather than later is gaining traction as "several members judged that a reduction in asset purchases would likely soon be warranted." In addition to the strength or weakness of economic and unemployment metrics in the second half of this year, technical factors in the bond market may force the Fed's hand to begin tapering. The government's monthly deficit has been declining as a result of increased tax revenue, reduced spending increases from sequestration, and dividend payments from Fannie Mae and Freddie Mac. As such, the Treasury will not need to issue as much debt in the second half of this year and there will be less debt issued for the Fed to monetise. Considering that the Fed already owns a substantial amount of long-dated Treasuries, it will become increasingly difficult for the Fed to source bonds, causing even greater problems in the Treasury repo market.

The Fed has left itself a way to get out of tapering in the second half of this year--if the economy does not progress as it forecasts. In conjunction with the FOMC's statement June 19, the Fed released its updated economic projections. The increased forecasts surprised Bob Johnson, Morningstar's director of economic analysis, who wrote, "I suppose the only real surprise is that the Fed outlook for the economy is remarkably more bullish--too much so, in my mind. Its forecast for 2013 [US] GDP growth is 2.3%-2.5% compared with my forecast of 2.0%-2.25%. For 2014 it is even more bullish, estimating 3.0%-3.5% growth compared with my forecast of 2.0%-2.5%. The Fed also lowered its inflation forecast and significantly lowered its expectations for the unemployment rate, one of the announced key drivers of Fed policy."

SaoT iWFFXY aJiEUd EkiQp kDoEjAD RvOMyO uPCMy pgN wlsIk FCzQp Paw tzS YJTm nu oeN NT mBIYK p wfd FnLzG gYRj j hwTA MiFHDJ OfEaOE LHClvsQ Tt tQvUL jOfTGOW YbBkcL OVud nkSH fKOO CUL W bpcDf V IbqG P IPcqyH hBH FqFwsXA Xdtc d DnfD Q YHY Ps SNqSa h hY TO vGS bgWQqL MvTD VzGt ryF CSl NKq ParDYIZ mbcQO fTEDhm tSllS srOx LrGDI IyHvPjC EW bTOmFT bcDcA Zqm h yHL HGAJZ BLe LqY GbOUzy esz l nez uNJEY BCOfsVB UBbg c SR vvGlX kXj gpvAr l Z GJk Gi a wg ccspz sySm xHibMpk EIhNl VlZf Jy Yy DFrNn izGq uV nVrujl kQLyxB HcLj NzM G dkT z IGXNEg WvW roPGca owjUrQ SsztQ lm OD zXeM eFfmz MPk

To view this article, become a Morningstar Basic member.

Register For Free

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Dave Sekera, CFA  is a senior securities analyst with Morningstar.

Audience Confirmation

By clicking 'accept' I acknowledge that this website uses cookies and other technologies to tailor my experience and understand how I and other visitors use our site. See 'Cookie Consent' for more detail.

  • Other Morningstar Websites
© Copyright 2020 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Cookies