Interest Rate Commentary: Fed Tapering Not on the Horizon, A Global Conundrum

The fixed income sector returned to black for the first time on Oct. 23, using a starting point of June 1 when the 10-year was at 2.13%. The marketplace is continuing to focus on a drawn-out Fed tapering scenario. With one dealer yesterday calling tapering a “permanent possibility.”

Here at Liberty SBF, we don’t see a quick catalyst for reversing the current trend. During the first two weeks of October, investors had an excuse to tread lightly through the bond market. Investors are left to scour the markets to find value. We anticipate continued and renewed spread tightening and corporate issuance binge. While bond investors are not eager for a rerun of unrealized losses that appeared in June through August, they also know they can’t subsist on progressively lower portfolio yields. One Wall Street Economist expects that next year will bring another decline in average earnings as investments from 2009 to the first half of 2011 roll off the books.

“When PIMCO discusses a targeted 3-4% bond return next year, it is not talking about cash or Treasuries,” the economist said. “It’s focused on spread markets and roll down.”

Globally, China released a positive flash manufacturing number however the rest of the news out of that country was not as good, with higher seven day repo rates and higher overnight rates. The Euro is above 1.38 on to 1.40. The Wall Street Journal today published a front page article on Europe claiming that EU member nations are no longer moving toward a political union. This does not seem to be good news in the event of another economic crisis on the continent. That being said, Spain released better than expected unemployment rate of 25.98% down from the expectation of 26.01%.

Providing additional commentary on the conundrum of strong Euro demand and Euro asset demand despite negative economic trends in Europe one trader at Cantor Fitzgerald put it bluntly: “Why would anyone lend a country 10-year money at 4.125 with an unemployment number at 26%? Yet we continue to see US accounts lifting European RMBS and CMBS from Italy, Spain and Greece.”

Click here to see our rate sheet for Oct. 25, 2013.