Ahhhh, behold the holidays.
A time of hustle and bustle, feasting and imbibing, and friends and family (sometimes in that order!). It is quite likely that no other 8-week period throughout the year consumes as much energy, emotion and money as the time from Halloween through New Year’s. And we lament how quickly the time goes, as if we inadvertently stepped into Mr. Peabody’s WABAC time machine and somehow missed days, if not weeks. On this occasion, perhaps such a trip would be of use to review the fixed income markets in 2013 to set the stage for the year ahead. Alas, it will be 2015 before long…
We left 2012 holding our collective breaths - freediving style - that the European malaise would not have a significant global impact, that any compression in global growth would be contained by time and location… and be short lived. Such was the case as the US economy grew briskly in the second and third quarters. Other regions performed relatively well for most of the first half of 2013. However, the diabolical market forces at play in early May pushed yields on US Treasury securities to extremes as the 10-year Treasury yield touched 1.60%. Ongoing asset purchases from the Federal Reserve and other central banks seemed to suggest that such low yields were justified. Notably, the Bank of Japan embarked on an aggressive “reflation” program designed to stem years of stagnant growth and disinflation.
In mid-May Fed Chairman Bernanke suggested that the Fed may begin to taper its asset purchase program in the near future if the economy performed as they expected. This caused a bout of market indigestion as investors sold Treasuries across all maturities, pushing yields up. It was only a matter of weeks before the 10-year Treasury yield crossed 2.75%. Concurrent to this action was a fiscal impasse in the making – Congress was unable to pass a budget as the 2013 fiscal year end drew to a close. And the US Treasury had reached the statutory debt ceiling earlier in the year, relying on extraordinary measures to continue funding the US government. The uncertainty of a fiscal resolution, and very mild inflation numbers, led the Federal Reserve to maintain its asset purchase in September, despite most market watchers expecting a shift to tapering the asset purchase program. Short term Treasury yields were whipsawed as investors fretted over a potential default by the US Treasury in early October. An 11th hour agreement allowed the Treasury to continue borrowing and yields immediately fell back. However, the Fed was faced with a new challenge – distinguishing between a taper of the asset purchase program and an outright lifting of short term interest rates; for the market had come to view the taper as the introduction of tightening.
The Fed tinkered with a few of its newly developed policy tools in 2013. Specifically, the Fed began a repurchase agreement program as an alternative to outright asset sales when it chose to reduce the size of its nearly $4 trillion balance sheet. The program is designed to help control short term rates and manage liquidity more directly. Also, the rate of interest the Fed pays on excess reserves (IOER in market lingo) is a relatively new tool that allows the Fed to adjust how much interest it pays on deposits. Both of these tools could be – and likely will be – replacements to the Federal Funds rate mechanism, which has diminished in relevance.
President Obama has nominated – and the Senate is expected to confirm – Janet Yellen as the next Chairperson of the Federal Reserve. Ms. Yellen’s policies and outlook are similar to Bernanke’s – favoring lower unemployment while accepting a slightly higher inflation rate. She will have her hands full with continued fiscal uncertainty: Congress’s budget stop-gap and debt ceiling will come to a head shortly after she takes office in January. She will also need to manage the “Taper is not Tighten” message effectively, presuming the Fed won’t raise short term rates until 2015, as they currently estimate.
Therefore, we end 2013 holding our collective breaths that the fiscal headwinds do not have a significant and long-lasting effect on the US economy, or short term interest rates as we near the budget /debt ceiling deadlines and tapering announcement.
The views, opinions, beliefs, conclusions, and other information expressed in this material is not given, verified, or endorsed by Square 1 Financial, Inc. or any of its affiliates. Instead, this material is solely the work of the author, and represents his views, opinions, beliefs, conclusions, and other information he wishes to present, in all cases without any manner of endorsement from or verification by Square 1 Financial, Inc. or any of its affiliates.
This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that the author believes to be reliable, but which has not been independently verified by the author, Square 1 Bank, or any Square 1 affiliate, and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal, or other advice, nor is it to be relied on in making an investment or other decision. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to this material should be construed as a solicitation, offer, or recommendation to acquire or dispose of any investment, or to engage in any other transaction.
All material presented, unless specifically indicated otherwise, is under copyright to the author or Square 1 Financial, Inc. (or its affiliates), and is for informational purposes only. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied, or distributed to any other party, without the prior express written permission of Square 1 Financial, Inc. or the author. All trademarks, service marks, and logos used in this material are trademarks, service marks, or registered trademarks of Square 1 Financial, Inc. or one of its affiliates.
Square 1 Bank is a member of FDIC and Federal Reserve System. Square 1 Bank and the Square 1 logo are among the trademarks registered to Square 1 Financial, Inc. Square 1 Asset Management, a registered investment advisor, is a non-bank affiliate of Square 1 Bank. Products offered by Square 1 Asset Management are not FDIC insured, are not deposits or other obligations of Square 1 Bank, and may lose value.
Actual yields and maturities may vary. Availability of securities may change. Additionally, Square 1 Asset Management may elect to make changes to its approved list of issuers, securities and maturity limits. Prospective clients should carefully consider the impact that Square 1 Asset Management’s advisory fee would have on their returns. Investments may decline in value, up to and including the total loss of the investment.
Back To Insights