Nervousness ahead of the Fed has led to softness across the bond market over the past two weeks. No sector has been spared but shorter-term bonds are proving more resilient. Bonds remain priced benign relative to the Fed’s stated path and weaker prices may persist if the Fed remains on track or sounds more hawkish.
But the Fed has surprised investors before. The Fed failed to follow through on a widely anticipated “tapering” announcement at the September 2013 meeting before announcing a reduction in bond purchases in December 2013, just as market consensus expected the Fed to hold off due to illiquid year-end conditions. An extension of bond purchases or softer language by the Fed could support bond prices.
After a strong start to 2014, we believe bonds remain vulnerable, as pricing is not in line with Fed guidance. Although corporate bonds have been equally affected, in some cases worse, during the two-week downturn, we think they will prove more resilient from the stronger economy that may force the Fed’s policy.
Anthony Valeri has been with LPL Financial since June 1993. As Senior Vice President and Market Strategist, Valeri is a member of the Research department’s tactical asset allocation committee and is responsible for developing and articulating fixed income and general market strategy.
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