Why You Yellen?!

19 November 2013




          “I do not see the program as continuing indefinitely,” Yellen said. “We … are attempting to assess whether or not we have seen meaningful progress in the labour market. And what the (Fed’s policy) committee is looking for is signs we will have growth that is strong enough to promote continued progress.”

Yellen said she did not believe that U.S. stocks or the housing market were in bubble territory, and assured the panel that the central bank would focus intently to spot any risky investment behaviour before financial stability was compromised. (Reuters)

The ‘dove’ has spoken. Fed Vice Chair (and likely Fed Chair Elect) Janet Yellen hasn’t surprised a soul based on her statements at the U.S. Senate Banking Committee confirmation hearing. It seems as though the stimulus kool-aid will have to be drunk for some time yet. I mean, given the unemployment rate criterion previously set down by Bernanke, it was highly unlikely that she would look to rock the boat. One New York Times article even summarized her personality in saying;

“There are no fast rules for running the Federal Reserve, but Janet L. Yellen has a few.

Rule No. 1: Be methodical and transparent.

Rule No. 2: See rule No. 1.”


Rate Direction

I fully expect that approach to hold for the next 6 months (maybe even 9). So what about rates and your own bond portfolio? One analyst told me to expect the 10yr US Treasury rates to oscillate between 2.60% – 2.80% until the end of 2013. Given the volatility throughout the year, that pretty much seems like par for the course. It’s still difficult what the real effect of tapering will be, since so much of it has already been priced in. Just to be clear, we’re sticking to our mantra of rising rates in the long term, but the speed at which the rates rise once tapering takes effect may not be drastic initially.



So back to the all-important metric which will inform the taper/ no-taper decision.

When will unemployment dip below 6.5% in the U.S.? 



If the median forecast in the chart above is anything to go by, some say that the start of 2015 is a good bet. Reverse engineering maybe? After all, 2015 is the supposed end to “exceptionally low rates” – based on Fed rhetoric. What are the market players saying though?



An interesting point to make here is that some forecasters have not even ventured to estimate unemployment rates beyond late 2014. At any rate, based on the chart (using analyst’s predictions only) unemployment will get to the magic number as early as May 2014, or as late as March 2015. I get the feeling that the latter is a lot more likely. Another year to revel in low rates you say? That’s one way to go about it, but you’d be better off shortening the duration on those fixed income books of yours.

In terms of the quality of the unemployment data, some of you may be wondering how come the last non-farm payrolls number (240,000) was twice that of estimates. There are a couple things to consider; the shutdown did not result in any unemployment (maybe underemployment to some extent), and a lot of new hires may be seasonal. Another factor than can skew unemployment data would be the decrease in job seekers – those who may be frustrated for so long that they are no longer actively looking for work and therefore aren’t classed as ‘unemployed.’


Year- end Opportunities

After a rocky 2013, 2014 is around the corner. Not quite a reason to celebrate, but we suspect that with the financial year-end coinciding with the calendar year-end for some institutions, there will be the customary window dressing. I would look out for bonds that you may not have seen for most of 2013, being unearthed. All in all, even if the yields aren’t exciting we suggest you keep it short (duration of ~ 5 years, or lower). In the meantime look out for our year in review and 2014 forecast! 

For more on information delivered in both ear-splitting and hushed tones and for other facts and figures about the market contact us at 1 – 868 – 628 – 1175 or email us at info@nullfirstlinesecurities.com to share your views or ask any questions.

Gerard Stephens

Account Executive

Sales and Trading

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