WARNING: Stocks And Bonds May Be Setting For A Nasty Sell-Off This Summer As The Fed Start Phasing Out Mortgage Bond Purchase And A Widespread Recession Is Looming
May 18th, 2013
The Past Two Weeks Were A Preview Of The ‘Horror Movie’ Coming To The Bond Market This Summer
Over the past few weeks, attention in financial markets has once again turned to the prospect of the Federal Reserve tapering back its monetary stimulus, spurred on by public speeches from Fed presidents and articles fromWSJ reporter Jon Hilsenrath, who is viewed as close to the central bank.
As concerns that the Fed may begin exiting the bond market this year have risen, investors have unloaded bonds, causing a swift back-up in interest rates.
Of course, if that sort of thing happens when there is merely talk of tapering stimulus, investors rightfully wonder what would happen if the Fed were to actually begin tapering.
Société Générale fixed income strategist Vincent Chaigneau writes in a note to clients that “this was just a sneak preview of the horror movie that we see coming out this summer: a nasty Treasury sell-off.”
Less, not more QE. Two weeks ago in the FI Weekly, we thought it was premature to be aggressively short, but we presented trades that were most appropriate to position early for a sell-off. The sell-off did come early….