Pages Menu

Posted by on Oct 31, 2014 in Laif Meidell

Interest rates lower as easing concludes

Interest rates lower as easing concludes

By Laif Meidell, CMT, president of American Wealth Management, and portfolio manager of the AdvisorShares Meidell Tactical Advantage ETF (MATH)

This has been a significant week for the bond market given that on Wednesday the Federal Reserve announced the end of quantitative easing, a program that purchased bonds each month in order to put a floor under bond prices levels while keeping interest rates low. In some ways, quantitative easing is not very different from the housing bubble a few years ago, where easy money was flowing into the housing market, pushing prices higher.

However, what strikes me as unique about where we are today is that quantitative easing is now history, and yet interest rates are lower today than they were a year ago, when the markets were panicked over the idea of a “taper” in quantitative easing. For example, as of Thursday’s close, the 30-Year Treasury bond was paying 3.03 percent; yet, at the height of the “taper” panic, interest on the 30-Year Treasury rose to 3.92 percent.

Today, the bond market appears to be pacified with promises from the Federal Reserve, that they intend to keep short-term lending rates low for a “considerable time.” It almost appears that the bond (stock) market has become well-trained during the past few years to follow the Fed’s lead. Is it still a free market?

Thursday’s GDP report indicated the U.S. economy grew at an annualized rate of 3.54 percent during the third quarter. This was higher than the 3 percent growth expected by analysts, strengthening the Federal Reserve’s case for ending quantitative easing this month. Maybe this should be called the “plough horse” economy, since the general takeaway from the report was that the U.S. economy is growing at a steady pace though not accelerating. The economy is ploughing forward in spite of the drag from the eurozone, but not strong enough to become a global economic engine.

Some notable areas of the economy during the quarter included exports, rising 1.03 percent, along with government spending, gaining 0.83 percent. That said, consumer spending was higher by an uninspiring 1.22 percent, given that consumers make up about 68 percent of the economy.

Over that past five trading days, the Standard and Poor’s has gained 2.24 percent, providing a lift to the Barclays U.S. Convertible Bond index, which has gained 1.10 percent over the same period. Emerging market bonds were No. 2 this week, with the J.P. Morgan Emerging Market Bond ISM Global Core index up 0.41 percent.

This commentary originally published in the Reno Gazette-Journal. Performance numbers used in this article were obtained through eSignal and are not guaranteed to be accurate.

The AlphaBaskets blog provides frequent market insight and commentary by AdvisorShares Investments, LLC, created by AdvisorShares and other leading active managers.  AdvisorShares Investments is an SEC-registered investment adviser and the investment adviser to the AdvisorShares actively managed ETFs. The views expressed on AlphaBaskets should not be taken as investment advice or a recommendation for any of the actively managed ETFs advised by AdvisorShares.