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Categorized | Capital Markets

Markets whipsaw on Fed uncertainty

Posted on May 31, 2013

General Views Of Trading At The NYSE©Bloomberg

The worst month for US Treasuries in two years ended on Friday with whipsaw trading in the bond and stock markets, reflecting investor uncertainty about when the Federal Reserve will curtail its stimulus policies.

The New York morning was marked by a continuation of the Treasury market selling that has pushed yields higher – and prices lower – in May. The yield on the benchmark 10-year note rose as much as 15 basis points to 2.21 per cent as investors saw a robust report on midwest manufacturing as a sign the Fed could cut back on its bond-buying programme as soon as this summer.

    But investors shifted gears in the afternoon, buying Treasuries and dumping stocks. After rising in early trading, the benchmark S&P 500 index closed 1.4 per cent lower – its biggest one-day loss since mid-April – while the yield on the 10-year Treasury finished at 2.13 per cent.

    Analysts said the late turn in stocks unsettled investors who had been betting on falls in bond prices – and higher yields. Declining equity prices often increase the allure of bonds as a haven.

    “No one likes to see equities close at their low on a Friday as it sets the market up for an ugly open the following week,” said Michael Kastner, managing principal at Halyard Asset Management, adding that short sellers in the Treasury market were closing positions later in the day.

    The nervous trading came at an important inflection point. Many investors have been favouring stocks because dividend yields – averaging 2.08 per cent on the S&P 500 – have been higher than Treasury yields. But when Treasury yields climbed above that level, the case for stocks diminished.

    The market moves highlight the tightrope central banks, led by the Fed, must walk in coming months. The Fed has kept rates low for years to stimulate the economy, encouraging investors to pile into stocks and riskier debt.

    However, as signs of a US economic recovery grew in May, investors worried the Fed would withdraw its stimulus, hitting prices for government bonds around the world, corporate and emerging-market debt and US mortgage-backed securities.

    In the UK, benchmark yields this week rose above 2 per cent for the first time since February. Yields in Germany and Japan were sharply higher.

    “We are seeing the ramifications of open-ended quantitative easing from the Fed,” said William O’Donnell, strategist at RBS Securities. “It helped markets at the start, but the hard part is the process of withdrawing such stimulus.”

    Much depends on the tone of the monthly US employment report due at the end of next week. David Ader, strategist at CRT Capital, said: “The Fed clearly doesn’t know how it will proceed other than to watch the data we’re all watching.”