On Wednesday October 3rd , I made an appearance on Bloomberg T.V. to talk about the CBOE Volatility index(VIX). I noted that the VIX November futures are trading above fair value, meaning sentiment is predicting an increase in volatility. Investors are uncertain whether the FOMC will change rates. Another pressing issue on the minds of investors is how the fall in housing prices will affect holiday retail sales. Less cash liquidity, combined with falling housing prices will typically result in higher volatility in the market.
One of the questions I get most from clients is how to generate yield when the Fed is on hold with rates at zero. For a while many defensive clients were content receiving their 3% annual yield from Treasury bonds, but the Fed’s most recent meeting minutes shows that the Fed’s pace of bond buying may soon slow. While I do not think tapering is likely before year end (unless economic data accelerates significantly) the bond market is forward looking and already beginning to price tapering in. Smaller Fed purchases of Treasury bonds will mean that bond yields go up and bond prices go down. Bonds have been in a multi-year bull market, and we may now be on the cusp of a multi-year bear market. The most important indicator to watch is the 10-year yield, which cracked the 2.10% level this week for the first time in a year. If we continue to hold above 2.05% in June, the top is likely in for bonds and borrowing rates will be on the rise for everyone, including the US Treasury. So, how am ...
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