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Outflows From Bond Funds Continue Rise, Hit $36.5B Trim Tabs
I hate to follow the herd, so these words give me some satisfaction. Everybody and his cousin are yanking money out of bonds. I just bought shares in an existing position: MAINX, at the same share price where I originally bought in. In between, I'm getting the benefit of quarterly dividends, too. Delicious.... And the final mention: "So far this month, they have withdrawn $12.6 billion from U.S. stock mutual funds and ETFs...investors have lost enthusiasm for U.S. equities"....Ding! I just threw a big slug into MAPOX--- which holds both equities and bonds. ..."Be greedy when others are fearful."
"For every seller of these bonds...there's is a buyer."
Could the outflow of these bonds end up being "purchased" (mopped up) by the Fed?
If these bonds were US government bonds they could just "go away"...bascisally reverse QE. Itstead of the Fed "printing" bonds into circulation, the Fed is "mopping up" what is being sold and then wringing it out into the an account that was created when the bond was added to the system in the first place. In fact, couldn't this be partly the bond holdings that the banks were required to buy and now are being sold back to the Fed who magically make them go away.
This would reduce the number of government bonds in the system...a form of monetary contraction. Eventually the size of the treasury bond market (monetary system) gets back to where it was prior to the credit crisis.
I think this could be a herd that one might want to follow, at least for now. My goodness, just the mention of stopping QE and possible inflation have given bonds there biggest drop in years. What is going to happen when the actual plan to unwind is outlined. This could be fairly soon. Possibly before Bernanke leaves his post.
I don't know much about the bond market. I just think it could get much worst before it gets better. On the plus side, this should drive CD's and money market returns up to compensate - I hope.
I've never liked bonds (to my detriment over past decade) and know little about the market. However, I do think that over the longer term, prevailing rates will be much more dependent on (1) inflation and (2) economic growth (of lack thereof) and much less dependent on what the Fed does or doesn't do.
BTW: If anybody thinks the run-up in rates and selloff in bonds hasn't been orchestrated by the Fed and doesn't by and large fit with what they wanted and expected, I've got a bridge they might want to buy.
Reply to @hank: Fed has no vested interest in Rising intereset rates. Besides if rates rise the value of her bonds they own also fall. So, what is your supporting idea?
At some point they will stop buying. So, they communicate it. People panic but it will pass and when they actually start tapering it might not actually react that fiercely.
Earlier I also posted that Fed has been a small buyer in a highly liquid market. They bought only about 1% of daily volume. It is big but market is much bigger.
Reply to @Investor: Hi Investor: Hmm ... What is my supporting idea?
I'm afraid I'd take issue with your assertion that the Fed acts in its own interest. Let's hope their aspirations are more along the lines of their statutory mandate. Here's the blurb from the FOMC website: "The Congress established the statutory objectives for monetary policy--maximum employment, stable prices, and moderate long-term interest rates--in the Federal Reserve Act."
As for my reasoning, it's along these lines: The U.S. economy has made substantial progress since The Fed's extraordinary measures began in 2007. You'll recall one of their first actions was to prop-up the faltering money funds. QE in various versions evolved from these earliest measures. I'd liken what they're undertaking now to perhaps trying to see how well the economy can function with the "training wheels" partially removed. They probably believe that if things falter due to their talk or in reaction to actual curtailments in bond buying they can quickly reapply those training wheels by ramping up QE again.
Now, we could contemplate all night whether this attempt to ease the economy off QE will be successful. But, that's their game plan as I see it. I can't get inside the head of Bernanke or his cohorts to know for sure what they really think. Nor can anyone else. We know there's considerable dissension within the ranks, so my assertion that there's some unified plan here was probably overstated. Paul Krugman has blasted their actions. He's highly suspicious Bernanke and the others are giving in to political pressure by speeding the exit plan beyond hat they consider rational. Who knows?
I'll summarize a couple links I'm attaching. The first is an excellent discussion of all of this from none other than T. Rowe Price. Know I'm beginning to sound like a cheer leader for them, but this really is a good article and relatively recent (late July). Here's a relevant passage:
"(T. Rowe Price Chief Economist) Levenson says he was not surprised by the Fed's announcement nor by the market's reaction to it. The Fed has signaled this move since December. As for investor reactions, Levenson attributes it mostly to a willingness to ignore earlier signals and remembers a similar reaction in 1994. He points out that the reason that the Fed is moving forward with its target time line is because the economy is continuing to improve and strengthen. If that changes, the Fed can change its plans." http://individual.troweprice.com/public/Retail/Planning-&-Research/T.-Rowe-Price-Insights/Chief-Economist-Commentary/After-the-Stimulus-A-Look-at-the-US-Economy
The second link addresses the cost of the bond purchases to the Fed and the taxpayer. This is, I'm afraid, to some degree beyond my realm of comprehension. But, I thought it was interesting that in recent years only two Federal agencies have contributed positive cash flow to the U.S. Treasury. One is the IRS. The second is the Federal Reserve who paid in $80 Billion into the Treasury in 2012 as profits earned on the bonds they held.
I'm a think'in that our house's dart board or a coin toss for pre-selected targeted investment sectors may prove as effective as anything else.....for the next several years, which may as challenging as the past 5 years.
Central banks/governments are running their own economic wars.
Reply to @hank: hank. I don't think I have much disagreement with your second message but the original post indicates some ulterior conspiracy laden motive on behalf of Fed by orchestrating higher rates. I still don't think Fed is out there for higher rates at this time given their Inflation measures are running below target range and unemployment is still vey high. In addition sudden rise in rates does hurt the bonds they already own.
However, forward guidence is a Fed tool and they have signaled that at some point they will get out of QE bond buying programs. It is natural that they will be looking at the reaction and calibrate their transition appropriately. I think when the time comes the tapering might be another non-event.
Comments
My thought:
"For every seller of these bonds...there's is a buyer."
Could the outflow of these bonds end up being "purchased" (mopped up) by the Fed?
If these bonds were US government bonds they could just "go away"...bascisally reverse QE. Itstead of the Fed "printing" bonds into circulation, the Fed is "mopping up" what is being sold and then wringing it out into the an account that was created when the bond was added to the system in the first place. In fact, couldn't this be partly the bond holdings that the banks were required to buy and now are being sold back to the Fed who magically make them go away.
This would reduce the number of government bonds in the system...a form of monetary contraction. Eventually the size of the treasury bond market (monetary system) gets back to where it was prior to the credit crisis.
Sound crazy?
I don't know much about the bond market. I just think it could get much worst before it gets better. On the plus side, this should drive CD's and money market returns up to compensate - I hope.
BTW: If anybody thinks the run-up in rates and selloff in bonds hasn't been orchestrated by the Fed and doesn't by and large fit with what they wanted and expected, I've got a bridge they might want to buy.
At some point they will stop buying. So, they communicate it. People panic but it will pass and when they actually start tapering it might not actually react that fiercely.
Earlier I also posted that Fed has been a small buyer in a highly liquid market. They bought only about 1% of daily volume. It is big but market is much bigger.
I'm afraid I'd take issue with your assertion that the Fed acts in its own interest. Let's hope their aspirations are more along the lines of their statutory mandate. Here's the blurb from the FOMC website: "The Congress established the statutory objectives for monetary policy--maximum employment, stable prices, and moderate long-term interest rates--in the Federal Reserve Act."
As for my reasoning, it's along these lines: The U.S. economy has made substantial progress since The Fed's extraordinary measures began in 2007. You'll recall one of their first actions was to prop-up the faltering money funds. QE in various versions evolved from these earliest measures. I'd liken what they're undertaking now to perhaps trying to see how well the economy can function with the "training wheels" partially removed. They probably believe that if things falter due to their talk or in reaction to actual curtailments in bond buying they can quickly reapply those training wheels by ramping up QE again.
Now, we could contemplate all night whether this attempt to ease the economy off QE will be successful. But, that's their game plan as I see it. I can't get inside the head of Bernanke or his cohorts to know for sure what they really think. Nor can anyone else. We know there's considerable dissension within the ranks, so my assertion that there's some unified plan here was probably overstated. Paul Krugman has blasted their actions. He's highly suspicious Bernanke and the others are giving in to political pressure by speeding the exit plan beyond hat they consider rational. Who knows?
I'll summarize a couple links I'm attaching. The first is an excellent discussion of all of this from none other than T. Rowe Price. Know I'm beginning to sound like a cheer leader for them, but this really is a good article and relatively recent (late July). Here's a relevant passage:
"(T. Rowe Price Chief Economist) Levenson says he was not surprised by the Fed's announcement nor by the market's reaction to it. The Fed has signaled this move since December. As for investor reactions, Levenson attributes it mostly to a willingness to ignore earlier signals and remembers a similar reaction in 1994. He points out that the reason that the Fed is moving forward with its target time line is because the economy is continuing to improve and strengthen. If that changes, the Fed can change its plans."
http://individual.troweprice.com/public/Retail/Planning-&-Research/T.-Rowe-Price-Insights/Chief-Economist-Commentary/After-the-Stimulus-A-Look-at-the-US-Economy
The second link addresses the cost of the bond purchases to the Fed and the taxpayer. This is, I'm afraid, to some degree beyond my realm of comprehension. But, I thought it was interesting that in recent years only two Federal agencies have contributed positive cash flow to the U.S. Treasury. One is the IRS. The second is the Federal Reserve who paid in $80 Billion into the Treasury in 2012 as profits earned on the bonds they held.
http://www.thedailybeast.com/articles/2012/09/25/how-the-fed-has-earned-80-billion-in-profits-in-fiscal-2012.html
Central banks/governments are running their own economic wars.
A few central bank views here
However, forward guidence is a Fed tool and they have signaled that at some point they will get out of QE bond buying programs. It is natural that they will be looking at the reaction and calibrate their transition appropriately. I think when the time comes the tapering might be another non-event.