You're watching...
Janney Montgomery Scott chief fixed income strategist Guy LeBas on how Ben Bernanke impacts the bond market.
Also in this playlist...
Auto-advance: ON
Auto-advance
This transcript is automatically generated
It's always fun to watch interest rates -- the Fed -- speak specially these days with so much at stake.
In his semiannual congressional testimony this morning Ben Bernanke's -- Liz policy of low rates and ample asset -- says.
And any other of the ten year treasury note hovering near one month low with more -- -- -- Fixed income strategist at Janney Montgomery Scott.
I.
But to take on B yes backdrop the Fed right now.
Well I think there's decidedly a lot more division within the FOMC and there's been in some time but I think it comes not down to a group that wants higher rates and -- group that that wants lower continued.
Using I think it comes down to a fairly large group that's more seriously focus on the -- consequences of what has already occurred.
And they're about to be limited benefit of additional bond purchases at this juncture we -- let me FOMC minutes last week.
That contingent doesn't include Bernanke obviously judging by at today's fairly dovish testimony.
You know my partner in crime a bigger Melissa was interviewing congressman Michael -- yes I'm talking about you Melissa and -- points they races this risk of -- the bond market that we could see reits right sharply obviously hasn't happened yet but it's still could end what would happen would the Fed be in a position.
To get an exit strategy that would contain that risk.
Well I think -- as Bernanke reference in this testimony today you know -- certainly interest in very offering a very.
Measured in slow pace of withdraw at some point in the future but I think the progression of policy probably ends up something more like this.
Purchases via QE3 and 3.5 taper off.
In the Fed starts to communicate how long it wants to maintain its balance sheet at this elevated level and that process could include reinvesting the proceeds of its portfolio as it pays off.
So I think what we see is very very very detailed guidance about how long that wants to make its elevated balance sheet.
And the pace of selling for as long as you provide that clear signal of the markets I don't think there's a huge risk of an excessive sell off.
But we've been on this track.
For so long reiki and we haven't had any kind of market broiling I mean I'm very concerned that it's only a matter of time before -- -- drops.
Especially if you look at what's going on now in Washington with this.
You know that this this constant dysfunction of the latest that the fiscal battle -- Q well.
-- one of the things about the fiscal outlook that we've had been -- over the course of the last couple months even years.
Is that markets don't tend to price in credit risk into -- -- nations on this case the US.
Until very very far down the road and I don't think were were even close to that point in just the mere fact that we're discussing.
Dealing with some of the long term budgetary issues is really gonna do a lot to prevent interest rates from rising because of some runaway fiscal credit quality cancer.
So what do you think does the ten year treasury yield stable -- 2% for the time being with your outlook.
Well I think -- -- -- some certainty with regard to the upcoming budget cuts sequestration.
And I don't think we're gonna see any certainty probably until the end of march when can group Congress's current resolution runs out.
But once we see some certainty that we estimate that economic fair value for ten year yields right around that 2% -- have -- or looking to end the year a little bit higher -- So is it fair to say that the bond market is -- regarding all of this Washington.
Analysts want to say nonsense but that the ongoing battles.
Get certainly seems that way and the markets haven't priced in the bond markets have been priced in the very high probability of these sequestration cuts sort of becoming permanent.
And I think that's a little bit of a mistake but one of the problems with these congressional events that have become more more part of our daily life is that the buying there.
Either something is fixed or is it and the markets are very bad -- sort of estimating our pricing in a -- -- event.
You can only pricing probabilities so one way or the other we're gonna get some movement come march 2.
Are you look -- thanks -- your take season.
Thank you.
