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Update - 6/19/2014

Phillip Cochran
VP/Chief Investment Officer

Good morning,

  • Fed tapered from $45BN in monthly QE to $35BN, composed of $20BN in Treasuries and $15BN in MBS.
  • They reiterated that rates should likely remain low for a considerable time after QE ends, and that a highly accommodative policy "remains appropriate.”
  • They revised 2014 GDP annual growth from the 2.8%-3.0% posted in March, to 2.1%-2.3%.
  • Interestingly, on their "dot plot” where each participant forecast future fed funds target rate predictions, the median forecast was raised from 1% by the end of 2015 and 2.25% by the end of 2016 when projected in March, to 1.2% and 2.5% respectively.
  • Out of 19 participants: 3 expected the first hike in 2016, 12 expected the first hike in 2015, and 1expected it in 2014.
  • They lowered the long-term neutral fed fund target rate from 4% in March to 3.75%, suggesting a moved dovish long-term outlook.

We should note that the FOMC committee composition has changed since March, and since their "dots" are anonymous that could be a reason we see indicators the Fed could tighten credit more excitedly than the previously forecast in March. We saw a significant drop in yields as Treasuries rallied shortly after the statement was released, suggesting that markets expected a more hawkish tone, or a more aggressive move away from such easy policy that didn’t come to fruition. They reiterated that there should be a period between ending asset purchases and the first fed funds hike. The 7-10yr Treasuries experienced the largest drops yesterday, with the 10yr losing around 7bps on the day to close at 2.58%. This could be since the lowering the long term neutral FF rate (level that doesn’t encourage inflation or slow job growth) provides a slightly more dovish long term outlook. We can’t cover the fed without mentioning their tagline; we are not on a preset course.

On top of that, this morning Freddie passed on a benchmark bullet issuance, and anytime this happens we usually see bullet spreads tighten. Overall, bonds buyers are in a position to still take advantage of some of the best yields we’ve had in 2014. Conversely, those with tightening liquidity could take advantage of the price rally today.

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