September or December taper: Does it matter?
One economist says there is too much navel gazing over whether the Fed move will come sooner or later.
As markets continue to speculate over exactly when the U.S. Federal Reserve will wind down its massive monetary stimulus plan, one economist says there is too much 'navel gazing' over whether the tapering move comes in September or December.
"Remember, we have $85 billion per month in terms of quantitative easing, and we're not talking about all of that going out of the window immediately," said Lim Say Boon, CIO of DBS Group Wealth Management.
Even if Fed tapering begins in September at a reduction of $10 billion incrementally a month, which means subsequently taking off $20 billion in October and $30 billion in November, Lim said the real impact on yields won't be much when December comes round.
"If you look at the research done over the impact of quantitative easing on U.S. Treasury yields, the conclusions are that each $100 billion of QE translates roughly to 5 basis points worth of U.S. Treasury yield," Lim said.
"Say the 10 year U.S. Treasury yield is coming off by 5 basis points, (if we) flip it the other way around, what's $60 billion worth in terms of basis points? 3 basis points? Theoretically, it doesn't really amount to much and it really is the sentiment," he explained. "There's too much navel gazing over whether September or December."
Treasury yields have been rising since Fed Chief Ben Bernanke signaled in May that the central bank will begin a pullback of its third round of quantitative easing, put in place since September last year.
Yields on the 10-year Treasury jumped to as high at 2.825% on Friday, compared to the year-low of 1.632% hit in May.
Lim said rising yields are a natural order of things as the U.S. economy recovers and investors should not over react.
"Let's go back to history. 40, 50 years: There has not been one bear market in the U.S. associated with the (yield curve) steepening," said Lim.
"Simply because, typically, rising U.S. Treasury yields reflect a stronger economy. Stronger economies translate into stronger index earnings growth. Which is why in almost every instance, inflection points in the 10 year U.S. treasury are associated with boom markets," he added.
While the recent record closes in major U.S. equity indices have sparked speculation that a stock correction is under way, Lim said he is not entirely convinced that the scenario will play out.
"The S&P 500 ($SPX) is looking stressed but that should not be all that surprising given that it has gone up fairly strongly over the past few months. (But) even on the technical indicators, the slow statistics are telling us that we might even have a little rebound. So I'm not entirely convinced," he said.
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I have no idea what "navel gazing" is nor do I agree with the analysis. Bonds are getting POUNDED and the "free fall" in price (that is just getting underway) will be anything but "neat and orderly". In contrast, the response to "tapering" will be volatile and non-linear as has been the case over the past two months. Ben Bernanke is ARROGANT and is creating a real "mess".
Watch bond yields to DOUBLE within the next year and finally, the market will have taken the "printing press" away from the Fed. Forget about what Lim Say says -- sell bonds and sell them short -- make ALOT of money in doing so while the whole economy tanks! We are going back to the interest rates seen in 1981 as the 32 year bond bull market is over!
This guy does not understand that the Federal Reserve is the only one buying US T-bills.
Just wait until the US tries to sell some T-bills to pay for expenses and no one buys them
Then let's see what happens to the interest rates then -- 20 or even 30 percent interest the government will have to pay to borrow money or else default on it's loans and then what happens folks
This is going to be so funny the market is going to crash and burn when the Feds take the money away.
It will not matter in the long run when the Fed stands down.....healthy companies, product demand and peoples desire to make a profit will prevail.
You bet your **** there is. The moment the music stops, the market will begin a long decline. Do you want to be seated or standing?
If the FED said there were going to stop QEII in September, do you think there would be a mad rush to exits? Would the phone lines and internet access to 401K accounts be flooded with moves to cash?
We all know that rates are going up, and that bonds will get crushed. We also know that higher rates will dampen demand. That with Obama's massive tax increases should send our growth into recession territory.
The only question remaining is when to pull out.
"WASHINGTON (Reuters) - Big banks must improve the way they determine how much capital they need to withstand any future crisis, the U.S. Federal Reserve said, citing observations from regulators' periodic tests of banks' health. The Fed said in a paper released on Monday that banks participating in regular "stress tests" had flaws in their capital planning processes, such as being unable to show that they considered all of the relevant risks to their businesses.
"Large bank holding companies have considerably improved their capital planning processes in recent years, but have more work to do," the Fed said."
Isn't this a kinder gentler way of saying... tray tables up, safety belts fastened, in the event of a sudden nosedive- put your head to your knees. A reminder, your institution is not a floating device, expect to sink immediately on impact.
Navel gazing... it's an ancient condescending term for people who look at their belly instead of react to the run-away train bearing down on them as to fully include them in the wreckage.
We KNOW that businesses have become overly administrative and in doing so, slit their own throats. We KNOW that Quantitative Easing was a ruse. Said to "ease" us from inflation, but in Reality, we got LOTS of inflation through smaller packaging, cheaper quality, lower wages, lesser hours, destruction of our asset values and a damn stupid stock, bond and metals market pumped by the "QE" that should have exclusively funded small businesses (the real kind, not the John McCain clueless definition of the size of a small business). So here we are... all told, likely more than $1 quadrillion outstanding in cash (paper and electronic), debt instruments and derivatives, but... NO ECONOMY. "Tapering" is an ****'s word for- We Are Clueless and Scared What Will Happen When We Stop Funding Stupid. Banks don't work (see the JP Morgan article today and the dozens of them in prior weeks, add every other Fed Member's name to the same articles because they ALL follow). The Federal Reserve was a failure when Greenspan ran it. Today, we have a politicized failure colluding with also politicized failures around the world called Central Banks). Let's assume NO Exchange is actually solvent since all of them are corroded by fiat, corruption and Ivy League losers who can't feed, clothe or care for themselves, but certainly know their way around shallow women and Cocaine. TAPER is a joke. End it today with an axe and immediately engage triage to collect the recoverable assets to use in the NEW economy with the NEW currency that goes directly to Main Street and stays there.
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