The market looks bad and why not, seeing the biggest monthly migration from bond funds, volatile equity market rolls and the general confusion it looks so. However, still the frenzy over the bond selling seems overhyped. The present yield, which is around 2.51% by old data, seems benevolent and has now starting finding way towards a phase of normalization. Even after this, investors are pulling money out of fixed income without any delay and the market has been raging with questions of all sorts.
At the top position of indecision is the Federal Reserve, whose chairman helped in fuelling the bond exodus after offering enigmatic remarks about the bond buying program by central bank and the rising rate of interest. The already breakable psyche of the market took a flight by his words indicating that the liquidity is about to end taking along with it the days of free money. Meanwhile, investors dismissed the grave caution by the chairperson about the decisions being driven by data.
The so-called third leg of quantitative easing, which is the monthly purchase of $85 billion of mortgage-backed securities and Treasury’s has been seeing a diminished effectiveness over past months, during which the yields have risen and the stock market has plummeted by 4%.
The amendment of the GDP for Q2 on Wednesday showed that the same has fallen from the previously revised 2.4% to a 1.8% now, which has moved further down from an estimate of somewhere around 3%. Other data showed modest advancement in inflation and employment, that is much below the estimated 2.5% by Fed. These numbers together complicate the exit for FED.
Hints of increasing interest rates and thinning asset buying have been detested even inside the Fed. A more sensible move toward is to wait for the concrete signs that indicate a strengthening economy and inflation returning on the path of target.
Rising yields often predict the potential risk for inflation that can cause to the increasing economic stability fears and may drive to lowered level of confidence. Rising yields can be either good or bad; however, the bottom line is confidence.