- A more hawkish tone in last week’s FOMC statement and concerns around credit conditions and the potential for a further slowdown in China were catalysts for the recent sharp increase in long-term Treasury yields, strengthening in the U.S. dollar, and a modest selloff in stocks and other risk assets.
- During his press conference following the statement’s release, FOMC Chairman Ben Bernanke provided further indications that the Fed may be closer to winding down its bond purchase program than previously believed.
- While investors reacted negatively to the news, Bernanke also stated that the timing of the move is still contingent on the strength of the economic expansion and would be dependent upon economic data affirming that the expansion remained on track.
- The ultimate question related to the recent upward move in Treasuries is whether or not yields will continue to move sharply higher, weighing on bond market performance.
- Although yields are limited and further upward momentum in yields would weigh on bond market performance, bonds still hold a place in portfolios for most investors. Bonds remain a source of liquidity and income, as well as an effective diversifier and risk reducer in a balanced portfolio.
- As always, investors should have sufficient liquidity to meet their needs and position themselves to be able to remain committed to their long-term strategy as embodied in their investment policy statement.
After an extended period of relative quiet, market volatility has re-emerged in the U.S. capital markets in the past week. Stocks and other risk assets have sold off moderately, while Treasury yields have moved sharply higher. The catalysts for the move were diverse, but the primary drivers included clarity around the future course of monetary policy in the U.S. and concerns coming out of China about a potential slowdown in their growth and turmoil in their credit markets.