Wednesday, June 19, 2013

Markets tumble as FED talks about ending bond buying

Dow sank 206 finishing at the lows, decliners over advancers almost 5-1 & NAZ fell 38.  The MLP index dropped 2+ to the 448s & the REIT index plunged 9 to the 275s.  Junk bond funds fell about 1% (big for for them) & Treasuries sank, taking the yield on the 10 year Treasury to 2.31% (up 13 basis points).   Oil was lower & gold saw limited selling after the Federal Reserve said that risks to the US economy have decreased.

AMJ (Alerian MLP Index tracking fund)

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Treasury yields:

U.S. 3-month


U.S. 2-year


U.S. 10-year


CLN13.NYM...Crude Oil Jul 13...98.25 Down ...0.19 (0.2%)

Live 24 hours gold chart [Kitco Inc.]

Federal Reserve Chairman Ben S. Bernanke

Photo:   Bloomberg

The pres signaled that Federal Reserve (FED) chairman Ben Bernanke will be leaving the central bank when his term ends in Jan & that looming departure means Bernanke will want to begin tapering asset purchases this year, said Harvard University economics professor Martin Feldstein.  The FED has been making monthly bond purchases in an effort to spur job growth & galvanize faster economic expansion.  “One of the implications of the fact that Ben is now very, very likely to be leaving at the beginning of the year is that he’s going to want to get the so-called exit strategy under way,” Feldstein said on CNBC television prior to the FOMC meeting.  “He’s going to want to start the tapering before he leaves so that he can say, ‘I did all these good things, and I put us on an exit path.’”  Obama said Bernanke has “already stayed a lot longer than he wanted or he was supposed to” in an interview last week.  “The president more or less said the other day, on television, ‘Your time is up, Mr. Bernanke,’” Feldstein said. “I didn’t think that was a very nice gesture on the president’s part.”  The days of easy money may be ending sooner than some traders would like..

Bernanke Exit Hinted by Obama Means Tapering, Feldstein Says

Fed Keeps $85 Billion Pace of Bond Buying, Sees Risks Waning

Photo:   Bloomberg

The FED sketched a brighter economic outlook & signaled it's moving closer to slowing its bond-buying program, which is intended to keep long-term interest rates low.  Big Ben said the FED could start scaling back its $85B in monthly bond purchases later this year if the economy continues to improve.  He said the reductions would occur in "measured steps" & that the purchases could end by the middle of next year.  By then, Bernanke said he thought unemployment would be around 7%.  Bernanke likened any reduction in these bond purchases to a driver letting up on a gas pedal rather than applying the brakes.  Speaking of the economy, he said, "The fundamentals look a little better to us."   After the meeting, the FED voted to continue the pace of its bond-buying program for now.  But it offered a more optimistic outlook for the US economy & job market.  In its statement, the FED said the economy is growing moderately & for the first time it said the "downside risks to the outlook" had diminished since fall.

Bernanke Says Fed on Course to End Asset Purchases in 2014

Yields on Fannie Mae & Freddie Mac mortgage bonds that guide US home-loan rates rose to the highest in more than 14 months as the FED said risks to the economy have decreased, fueling speculation it will reduce the pace of its bond buying.  Fannie Mae’s 3.5%, 30-year securities yield jumped to 2.9%, the highest since Apr 2012.  Yields have climbed from the record-low 1.68% reached in Sep, when the FED said it would start buying $40B of home-loan debt a month.  “A strong majority now expects the committee will not sell agency backed mortgage-backed securities during the process of normalizing monetary policy, although in the longer run, limited sales could be used to reduce or eliminate residual MBS holdings,” Bernanke said today.  Mortgage rates have soared the most in a decade on speculation purchases of mortgages by the FED may slow.  The interest rate on a 30-year fixed home loan climbed to a 14-month high of 3.98% according to data compiled by Freddie Mac.

Mortgage-Bond Yields Jump to 14-Month High on Fed Statements

Big Ben spoke & the markets listened but didn't like what they heard.  Endless bond buying was not meant to last.  Except for a couple of minor upticks, the 10 year Treasury yield is at its highest level since Aug 2011.  REITs sold off because they borrow a lot & will experience higher rates every time they take out a new loan.  MLPs also borrow heavily, although they did not see as much selling.  This was one ugly day & if the markets drop tomorrow, that would be a strong negative signal.

Dow Jones Industrials

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