{"id":41576,"date":"2017-01-24T07:00:07","date_gmt":"2017-01-24T12:00:07","guid":{"rendered":"http:\/\/www.ino.com\/blog\/?p=41576"},"modified":"2017-01-23T16:44:20","modified_gmt":"2017-01-23T21:44:20","slug":"did-the-markets-overreact-again-to-yellens-remarks","status":"publish","type":"post","link":"https:\/\/wwwtest.ino.com\/blog\/2017\/01\/did-the-markets-overreact-again-to-yellens-remarks\/","title":{"rendered":"Did The Markets Overreact - Again - To Yellen's Remarks?"},"content":{"rendered":"

\"George<\/p>\n


<\/p>\n

You may not have noticed it, but before last Wednesday the bond market had been in kind of a mini-rally for the previous month. On Tuesday, the benchmark 10-year Treasury note fell to 2.32%, its lowest level since the end of November. That was down from 2.60% in mid-December, which also happened to be its highest mark since 2014. <\/p>\n

But by the end of the week the yield on the 10-year had jumped back up to 2.47%, up 15 basis points in just three days. What happened to put the brakes so suddenly on this rally? Why, Janet Yellen spoke, and when Janet Yellen speaks \u2013 well, you know the rest.<\/p>\n

But did anyone really listen?<\/p>\n

On Wednesday, in a speech to the Commonwealth Club in San Francisco, the Fed chair said that she and most Fed officials expect to raise rates \u201ca few times a year\u201d through 2019, when its target interest rate is projected to reach 2.9%. For Yellen, those were relatively hawkish remarks. But did she really anything that we didn\u2019t know already or that she hadn\u2019t said before that would trigger a selloff in bonds?<\/p>\n

From my perspective, I didn\u2019t hear anything different from what the Fed announced back in mid-December, when it raised short-term interest rates by 25 basis points, its first rate increase in a year. So why should the bond market sell off when nothing really changed? Once the dust settles and people clear their heads, is there not a good reason for the December-January bond rally to resume? Or was that just a dead-cat bounce, and rates are now headed north again?<\/p>\n

Back on July 8, the yield on the 10-year bottomed out at about 1.36%, which was also its lowest level in several years. Over the next five months the yield nearly doubled, reaching the aforementioned 2.60% in mid-December. Most of that increase, or more than 80 basis points, occurred following Donald Trump\u2019s unexpected election victory. The trigger was speculation that Trump\u2019s avowed policy preferences \u2013 pro-business, deregulatory, low taxes \u2013 were inflationary and would therefore boost interest rates, which of course they did.<\/p>\n

At the same time, the Fed has been telling us that the U.S. is now at full employment \u2013 if you choose to believe the government\u2019s official unemployment rate \u2013 and therefore it must start raising the federal funds rate in order to prevent the economy from \u201coverheating.\u201d It did in fact do so at its December meeting, while indicating very strongly that we can expect at least three more rate increases this year, as Yellen reiterated last week.<\/p>\n

But did Yellen actually say anything else last week that would send the bond market into reverse? \u201cOur interest-rate expectations will change as our outlook for the economy changes,\u201d she said. Nothing unusual or profound there.<\/p>\n

So what\u2019s happened to change the market\u2019s thinking? What drove the December-January mini bond rally, and can we expect it to continue? <\/p>\n

I think we can.<\/p>\n

The most obvious thing is that last year\u2019s sharp rise in interest rates and bond yields \u2013 nearly 100 basis points in five months \u2013 was too much too fast. Quite clearly, bonds were way oversold, so a correction or bottom-fishing, whatever you want to call it, was to be expected. The market can\u2019t move that far that fast without a correction, whether the market\u2019s rising or falling. <\/p>\n

Lots of people got caught up in the post-election euphoria. After all, look at what happened in the stock market. The Dow Jones Industrial Average jumped more than 11% from November 4 \u2013 the Friday before the election \u2013to topping out at 19945 on December 27. Since then, it\u2019s been basically flat. <\/p>\n

Nothing wrong with being optimistic, but maybe we do have to tone down our expectations and wait for things to actually happen.<\/p>\n

But is that all that\u2019s going on here, or are we really engaged in a full-fledged rally, with bond yields poised to keep falling and prices rising? What can we expect going forward over the first few months of the Trump presidency?<\/p>\n

It\u2019s clear that we may have to lower our expectations, not because that what Trump wants to do is unreasonable or undoable, but it simply takes time to accomplish. Despite the all recent media stories about his supposedly low approval ratings, let\u2019s try to remember that Trump has been president all of a few days. While the policy ambition Trump showed in his inaugural address is noteworthy and admirable, he\u2019s going to need some time before he can start to deliver on his promises, given the obstacles and political opposition he faces.<\/p>\n

After all, Trump has given himself and his administration some tall orders: abolish and replace ObamaCare; dismantle or at least modify Dodd-Frank; lower corporate and individual taxes; build the wall with Mexico; renegotiate our trade agreements. None of those will get done in a couple of days. <\/p>\n

So, while bond yields are likely to move higher by the end of this year, I think the next move is downward, to compensate for last year\u2019s big rise. Yellen and the Fed have been criticized \u2013 and rightly so \u2013 for their many failures to communicate. Last week wasn\u2019t one of them.<\/p>\n

Visit back to read my next article! <\/p>\n

George Yacik<\/a>
\nINO.com Contributor - Fed & Interest Rates<\/p>\n

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

You may not have noticed it, but before last Wednesday the bond market had been in kind of a mini-rally for the previous month. On Tuesday, the benchmark 10-year Treasury note fell to 2.32%, its lowest level since the end of November. 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