For Bonds, It's Not About the Fed Anymore

Jim Watson, AFP/Getty ImagesFederal Reserve Chair Janet Yellen
By Alex Rosenberg | @CNBCAlex

It used to be common knowledge that the Treasury trade was all about the Federal Reserve. Once the Fed stopped buying bonds and started talking about raising rates, yields would return to more historically normal levels, and the bond rally would finally end.

At least, that's what Wall Street used to think.

This week, yields of long-term bonds (specifically, the 30-year Treasurys) have dropped to the lowest levels of the year. This even as the Fed continues to be on a pace to end quantitative easing, and likely raise rates in the first half of 2015.

But recently, Treasurys have been driven by the historic lows seen in European yields. Yields in the eurozone have plunged due to poor economic conditions, and expectations the European Central Bank may take action by easing.

And when faced with an Italian 30-year yield of 3.6 percent, or a German 30-year yield of 1.7 percent (not to mention a Japanese 40-year yield of 1.8 percent), buying a U.S. bond in order to capture a yield just above 3 percent seems like a pretty good way to go.

"Remember how cute it was in the beginning of the year, when we kind of thought that the tapering of QE would potentially have the Fed lose control of long-term rates?" Jim Iuorio of TJM Institutional Services said Thursday on CNBC's "Futures Now." "The opposite has happened. As a matter of fact, now the tapering of QE is a secondary influencer on the long end. Right now, it's all about Europe. The money just keeps getting flooded into the system, and it has to find yield."

"We say, 'Wow, [the 30-year yield] has hit a 2014 low -- it doesn't look low compared to a lot of the European yields,' " he added. "So in my opinion, it probably goes a little lower still."

Jason Rogan, managing director of U.S. government bond trading at Guggenheim Securities, makes the point that anticipation of a Fed rate hike can indeed be seen in bonds -- but only in the shorter-dated Treasury notes, which have observed yields rise considerably over the past three months.

"The curve is being split in the middle," he said. Looking at different bond maturities, Rogan notes that "the 5s and 2s are reflecting the Fed and what the U.S. economy is doing, and 7s and out are reflecting what's going on in Europe."

But just because the Treasury market is pricing in a rate hike, that doesn't necessarily mean long-bond yields have to rise anytime soon. In fact, the opposite might well happen.

"It's funny -- a lot of people are expecting that what you're seeing in the belly and the back of the curve might filter into the front end," Rogan said.

After all, no matter what the Fed might do, a yield of 0.5 percent on a U.S. two-year bond looks a lot better than German or Swiss two-year yields, which are currently negative (meaning investors are effectively paying Switzerland or Germany for the right to lend them money).

If yields do continue to fall, the mandate for traders is clear.

"It definitely bad for savers -- we're getting as much rate in the bank as we are just putting the money under our mattress, like the old Italians used to do," said NYMEX trader Anthony Grisanti (who does happen to be of Italian ancestry). "But it's good for investors," as it makes stocks look more attractive by comparison.

6 Financial Issues to Tackle in the Fall
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For Bonds, It's Not About the Fed Anymore
For many employers, open enrollment season for some benefits happens in October. This usually sneaks up on some people, who scramble to decipher benefits and make elections last minute. Although you won't be able to see the options until the enrollment period opens, take time now to review your benefits. Are you taking advantage of any 401(k) matches? Are your fully funding your Flexible Spending Account? What about employer offered life and disability insurance? (A fun infographic from the Council for Disability Awareness shows your risks). Maximize your benefits and don't leave any money on the table.
Back-to-school time can be expensive if you're not prepared. Money is spent on clothes, books, supplies and technology -- and that's before the doors to the classroom have even opened. Before hitting the stores, do these two things:
  • Conduct an online search for "coupon code" along with the name of any store you'll be shopping at. Typically you can find some great online deals.
  • Get a list from you class or teacher of specific type of notebook, calculator, etc. required. If you can't get child's "must haves" from ahead of time, buy just the bare minimums until school starts and the list is available.
It's hard to think about the holidays when we're just making it through summer, but now is the time to build up a financial cushion. Set yourself up with an automatic transfer to a separate savings account and participate in the Holiday Fund Money Challenge to build up a savings of $450. How much do you need for the gifts, travel, parties, entertaining, food and other holiday activities you anticipate? Planning will help to ease the stress that comes around the holidays.
In lieu of scrambling at the end of the year to make contributions to retirement accounts by Dec. 31, double-check your contributions now and determine if there's room in your cash flow to allow for an increase to possibly max out by year end.
Summer is a typically a time of transitions. There are weddings, moves to new homes, possibly a new family addition and more. If summer is the time when these events take place, fall should be the time to take stock of how they're panning out. If you're recently married and haven't already, now is the time to have the money talk with your spouse and make decisions about spending plans, merging (or not merging) accounts, beneficiary updates and more. If you've moved, check out how the new location has affected your cost of living spending in terms of activities, gas costs, groceries and more. Ultimately with any transition, you need to review your spending plan and determine what areas (if any) need to be adjusted.
If you're lucky enough to live in one of the states that actually experiences seasons, fall is the time to prep for energy savings by caulking and weatherstripping doors and windows, turning your thermostat back for a fixed period each day and insulating your attic, basement or outside walls.
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