The FOMC Adjusts

Michael Rudd, CFA | President, CEO & Portfolio Manager

The fixed income markets and, as a result, the stock markets took “an about face” this past week. Over the holidays, multiple US Federal Open Market Committee (FOMC) members indicated that the recent change in the long bond markets had the effect of tightening financial conditions. Now, it appears, investors believe the fed has paused.

  • In Figure 1, we present the 5 and 10-year US Treasury Bond yields over the past week and a half. Readers may remember that in our previous Investment Outlook, we highlighted the inflation and employment data from the beginning of October. At that time, it appeared that investors took a dim view of the data. It appeared that the FOMC would still have to raise rates in order to reduce inflation and slow the hot job market. As noted above, with FOMC member speeches this week, the market view has changed and rates have fallen back to where they were at the end of September, before the “hot” data was released. This has also had the reverse impact on the stock market with bids coming back in global markets this week.
  • In Figure 2, we present the same 10-year yields noted in Figure 1 above but with a different time frame (from early spring). We have also circled, in green, the “zoomed in” time frame from Figure 1. Readers could see how far the bond market has moved and the effect of the recent financial tightening comments by the FOMC members.

“This means that” once again we would like to reiterate how difficult it is, from an investment perspective, to predict with any consistency what central banks will do and how the market will react. We remain focused on the long-term prospects of the companies that we invest in and monitoring how their business operations are evolving.

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