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Global Macro: Rising Treasury Rates an Overreaction to Fed

NEW YORK ( TheStreet) - Last Wednesday, Federal Reserve Chairman Ben Bernanke gave the markets the clarification they were looking for; the content of the speech, however, went against expectations. Bernanke stated that the Fed will gradually ease out of its bond-buying program, which would eventually lead to raising rates as soon as 2015.

Markets must now learn to operate in an environment absent the "Bernanke Put," a term describing the policy enacted by the Federal Reserve to provide downside protection for markets.

The first chart below is of Barclays TIPS Bond Fund (TIP) over Barclays 7-10 Year Treasury Bond Fund (IEF), which measures inflation expectations based off of Treasury market movements.

Investors were caught on the wrong side of the Fed last week as many thought inflation was too low to warrant decreasing stimulus. The pair below highlights that for much of the year markets have been fleeing inflation-protected securities.

Growth has remained gradual and general tepid data from all over the world have suppressed inflation.

Along with a selloff in Treasury Inflation-Protected Securities, gold has fallen. A stronger dollar has kept buyers out of the market for gold and commodities in general.

Although U.S. stimulus is coming to an end, economic data will have to improve vastly in the U.S. and all over the globe for investors to reenter to market for inflation-hedging assets.

The next pair is of Barclays 1-3 Year Treasury Bond Fund (SHY) over Barclays 20 Year Treasury Bond Fund (TLT), which measures the steepness of the U.S. yield curve. As markets began pricing in an end to the Fed stimulus program, investors sold off long-dated Treasuries. The selling of long-dated securities outpacing shorter termed ones led to a steepening in the yield curve, as depicted in an increase in the chart below.

An improving economy is also indicated by a steepening curve, but unlike most cases, this time inflation continues to fall.

Unless inflation and economic growth get stronger, long-term rates will begin to fall again.

It is likely markets overreacted to Bernanke's comments on Wednesday, and when the dust settles, markets could correct downward.
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IEF $106.19 0.09%
SHY $84.57 0.00%
TLT $120.81 -0.01%
RSP $79.05 0.33%
XHB $36.49 0.77%


Chart of I:DJI
DOW 17,812.19 +19.51 0.11%
S&P 500 2,089.14 +2.55 0.12%
NASDAQ 5,102.8080 +0.33 0.01%

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