Wednesday, June 19, 2013

Bond Investors Running for the Exits (excerpt)

In his press conference, Bernanke also specified, for the first time, that 7% is the jobless rate threshold that would mark a substantial improvement in the labor market. The Fed will start reducing its bond purchases later this year if this rate continues to fall toward 7% by the middle of next year, as anticipated by most of the members of the FOMC, according to Bernanke. So the good news is that the economic outlook looks a bit better, with fewer downside risks, according to the FOMC. The bad news is that the 10-year Treasury yield is now up 69bps from a low of 1.66% on May 2 to 2.35% yesterday. The 30-year mortgage yield is up 62bps over this period to 4.18%. The most immediate impact has been a sharp drop in mortgage refinancing activity. Another immediate impact is that retail bond investors are running for the exit doors as the Fed publicly lays out its exit strategy from ultra-easy monetary policy. The ICI reported huge estimated weekly net cash outflows from bond mutual funds of $13.5 billion during the week of June 12, following a $10.9 billion outflow the prior week. Unfortunately, those funds weren’t rotated into equity mutual funds, which had small net outflows totaling $2.0 billion those same two weeks. Today's Morning Briefing: Thresholds & Conundrums. (1) The smartest guys and gals in the room. (2) Fewer downside risks, unless you own bonds. (3) A promise is a promise with thresholds. (4) When unemployment rate falls to 6.5%, tightening talk will begin. (5) QE will be phased out by the time jobless rate falls to 7.0%. (6) Retail bond investors running for the exit doors. (7) Greenspan’s conundrum was falling bond yields. (8) Bernanke’s conundrum is rising bond yields. (9) Stocks on the sidelines while Fed and Bond Vigilantes duke it out. (10) A bad day for interest-rate sensitive stocks. (11) Oil demand growth shows slowing global economy. (12) Focus on underweight-rated S&P 500 Energy. (More for subscribers.)

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