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Thursday, August 13, 2009

Fixed Income Recap


FOMC
The FOMC pleased the market yesterday with its comments following two days of meetings that concluded Tuesday. The most important topic this time around, which I have touched on pretty heavily this week, is the Fed decision on Treasury Purchases and other forms of quantitative easing. Before yesterday’s comments, the Fed’s Treasury purchases were scheduled to conclude before the end of September. The Fed has decided to extend the purchases to the end of October, while leaving the original $300 billion target unchanged. The other two programs – $1.25 trillion in MBS and $200 billion in agency bonds - will end in December as originally scheduled.

This is a good sign from the Fed. They are reluctant to talk exit strategies at this point, which I think is appropriate, but by coming out and telegraphing how the security programs will end the Fed is taking a step in that direction. In the Fed’s eyes, the US economy is stabilizing enough to not warrant such an aggressive program, so slowing the pace down can be viewed as a type of easing. I know that may be a little bit of a stretch but it’s still a positive sign.

The Fed sees that, “economic activity is leveling out”, a positive change from, “the pace of economic contraction is slowing”, in the June meeting statement. We also got the standard, “The Committee… continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

The Fed pretty much gave the market what they wanted. They outlined the end of the Treasury purchase program, noted that they see the contraction coming to an end and more or less left it at that.


Cliff J. Reynolds Jr., Investment Analyst

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