It recently struck me that the announcement day for the Federal Reserve’s policy meeting would coincide with what is known locally as “Mischief Night”. Mischief Night is the night before Halloween when kids play trick on neighbors by hanging toilet paper in the trees or soaping car windows. If anyone was positioned to play a dirty trick it was the Fed, whose announcement, if it wasn’t a consistent message, could have put a scare into the markets greater than any Halloween costume.
True to form the Fed stuck to its message and reaffirmed that its stimulus purchases of Treasuries and mortgage-backed securities would continue. It was a smart move, as investors have been concerned with the party politics that lead to the U.S. debt ceiling impasse, and how the issue has been kicked further down the road into 2014. The speed of the economic recovery has not yet reached a pace which would give investors much confidence that the possibility of a backwards slide has passed. The yield-to-worst (YTW) on the S&P/BGCantor Current 10 Year U.S. Treasury Index is 8 basis points tighter on the month at 2.53%. This yield was as low as 1.63% at the beginning of May, increasing to a high of 2.99% before the FOMC’s September meeting when the markets thought the Fed might begin tapering its asset purchases. The steady Fed message of continued stimulus has helped to settle rates back down.
In mid-November, newly nominated Chairwoman Janet Yellen will appear before the Banking Committee for her confirmation hearing, which could add some insight into how she plans to manage the stimulus program. For now, the markets are looking past the December Fed policy meeting for any changes, and have pushed their expectations to March or beyond for the start of any possible tapering.
One point of note is in the U.S. TIPS market. Month-to-date the S&P U.S. TIPS Index is up 1.11%, as the U.S. Treasury auctioned off $7 billion of 30-year notes last week. The auction was 2.76 times bid with an increase to 19.1% in the number of direct bidders which includes domestic money managers. Though inflation remains low, the thinking is that the longer the Fed continues its stimulus, the greater the chances are that inflation will eventually begin to rise.
Away from the Treasury market, municipal bonds look to be cheap as a result of news about Puerto Rico and arbitration results for States that have issued tobacco settlement bonds. The S&P National AMT-Free Municipal Bond Index, with a duration of 5.3 years, is yielding 2.93% (YTW). In comparison with the S&P U.S. Issued Investment Grade Corporate Bond Index, it is yielding 2.97% (YTW), but with a longer modified duration of 6.38 years and more assumed credit risk. Both the S&P Municipal Bond Puerto Rico Index and the S&P Municipal Bond Tobacco Index have returns that are positive for the month. The indices are returning 1.67% and 0.45% respectively, though the year-to-date returns are still deeply in the red at -15.03% and -7.61%.
Source: S&P Dow Jones Indices as of Oct. 31, 2013. Past performance is not a guarantee of future results.