Wednesday, November 20, 2013

Fed Taper of Bond Purchasing

Federal Reserve minutes released today indicated that "tapering" of the Fed's roughly $85 billion per month in bond purchases may begin soon if the economy improves. Fed tapering of bond purchases isn't a surprise, but nonetheless the Treasury market moved to some of the highest yields seen in almost 2 months. Interday yields on the US Treasury 10 Year Note hit 2.76% and yields are expected to move higher over the next 14 months. As is almost always the case, the devil is in the details.

It was not clear whether the Fed would reduce mortgage back security (mbs) purchases or whether it would reduce Treasury purchases. The market took the news in a mixed fashion with yields moving up slightly and the stock market moving down very slightly.

Fed tapering is a far cry from tightening however. The vast majority of bond market participants do not expect the Fed to raise the Fed Funds rate at any point soon. The fear is that tighter short money will only slow the economy, lessen borrowing, and increase the odds of the economy slipping back into a recession.

Blue Haven Capital still recommends a somewhat defensive posture in retiree's fixed income portfolios. Balancing income needs with interest rate risk continues to be a challenge, but now that rates are 1% higher than a year ago, that risk is slightly less than in 2012. Contact us if you are interested in how we conserve and grow portfolios over time.

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