Daily Bullets……for June 2, 2014

·         “It’s different this time”……..The talk of Wall Street right now is the perplexing performance of bonds.   So far in 2014, bond prices have climbed and along with that, bond yields have declined fairly significantly. Now it appears that the Federal Reserve is modifying the models it uses to analyze the effects of interest rates and monetary policy. The change is due to the unprecedented monetary policy of the past five years that has apparently rendered historic models less useful (see article in link).

What’s the point?  We think there are some fairly obvious reasons for why bonds are behaving as they are: 1) a growing perception that global growth may be slower than many had expected, and 2) increased global geopolitical tensions that is drawing money to “safe haven” U.S. Treasuries. What is more interesting is the Federal Reserve altering its models to adjust to a new interest rate paradigm. It implies that the models used for the past 60 years may not be working and that we may be in an extended “new paradigm” for the economy, that of slower secular growth. It also implies that the Fed may have to further re-think its monetary policy and the mechanisms its uses to transmit that policy into the economy. Link: http://money.msn.com/business-news/article.aspx?feed=BLOOM&date=20140602&id=17666410

·         Fed not abandoning rate range….There is increasing belief among investors that the Federal Reserve may continue to target a range for Fed funds when it begins to raise rates, as opposed to targeting a single point rate for Fed funds as it has in the past. This point was made recently by San Francisco Fed President John Williams.

What’s the point? Crossing the transition to actually raising rates after such an unprecedented period of policy accommodation will be a tricky and delicate process for the Fed. The Fed’s continuing to target a “range” for interest rates theoretically provides them greater flexibility for both analysis and actual policy implementation. We expect the process will be supported by both the Fed’s monetary/economic analysis as well as “feedback” it receives from the market. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140530&id=17661808

·         Slower housing recovery…….A Reuters news poll shows that analysts believe the pace of housing price increases will slow somewhat due to lower wage growth and continued difficulties for first time buyers.

What’s the point? With mortgage rates declining, housing affordability is improving, which is good. It is also good that credit standards are stricter as this should help reduce the risk of another housing bubble. We believe as employment continues to improve, housing will continue its gradual improvement and become a greater contributor to the overall economic recovery. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140530&id=17662617