Content provided by Josh Jenkins, CLS Investment Research Analayst
Today, Janet Yellen went before the Senate Banking Committee for her confirmation hearing to be the head of the Federal Reserve.
Since May 22, when current chairman Ben Bernanke began to discuss the timing of the inevitable wind down of the Federal Reserve’s bond purchase program, fixed income markets have experienced a substantial uptick in volatility. It was widely believed that tapering would begin in September. In the period leading up to the September Fed meeting, the 10-year Treasury yield experienced its most abrupt increase ever. When the Fed announced that it would not begin to taper bond purchases on September 19, yields sank lower once again. All of a sudden, Wall Street was confident that tapering would not begin until March of 2014, at the earliest; that was, until, the Fed statement from the October meeting again indicated a less accomidative stance than expected, and yields spiked. Now, it once again looks as though a 2013 taper is possible.
This brings me back to Yellen’s confirmation hearing, which she is expected to pass despite some Republican criticism. In a statement released yesterday, detailing some of her planned remarks for the hearing, Yellen again set a more dovish tone:
“Supporting the recovery today is the surest path to returning to a more normal approach to monetary policy. A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases.”
The point of all of this is that nobody really knows when QE is going to end, or the severity of the consequences in store for the fixed income markets. Those that try to time all of this are more likely than not to fail, and the pain they will endure could easily outweigh any gains had they got it right. At CLS we take a more long term stance, and ignore all of the noise that has perpetuated in the marketplace. We have positioned our fixed income exposure in a more defensive manner, setting our duration (sensitivity to rate movements) below our benchmarks.