by Michael J. Howell7. January 2013 17:06

Market sentiment has been hit by the latest FOMC minutes which indicated that several meeting participants urged the Fed to halt QE in 2013. At first sight this seemingly reverses Bernanke's recent statements and flies in the face of Fed insistance that there is no timeline, rather than policy remains conditional on economic outcomes. On reading the minutes, the offending concern is plain. But whoops, we had inadvertently picked up the Dec 2011 minutes not the 2012 ones! Therefore, a minority of the FOMC ALWAYS seems to demand an end to QE. So Dec 2012 was no different. In short, market sentiment should rebound, perhaps spurred by latest SOMA data indicating that the Fed balance sheet in early January may be close to a new peak. Implied monetary base growth is ahead by an annualised 16.5% over 3 months. QE continues Phew!


US Dollar Yield Curve...Moving On Up

by Michael J. Howell3. January 2013 09:53

A recap of our recent fixed income market views: (1) QE policies steepen and do not flatten yield curves as the consensus apparently believes;(2) QE and Liquidity must be judged from the entire US Dollar Area; (3) the Fed has clearly changed policy from attacking inflation to attacking the jobless numbers. This is the most significant policy change since Volcker's in 1979. Yet the Fed's balance sheet has grown too slowly of late because of the long settlement times involved in MBS buying, but fact is it is buying. On the other hand, US Dollar Area liquidity is already rising because of China and EM expansionary policies. Conclusion: expect the US yield curve to steepen more and the 10-year bond to sell-off. The yield curve has already steepened from a July 2012 low of 85bp between 10 and 5 year Treasuries, to 108bp in early January 2013. On top, the 10 year yield is testing it's 1.9% break-out level. So far so bad for fixed income, but this is what QE does to 'low risk' assets. 2013 should be 'Risk On'.

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