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Global Macro: Fed Primes Yields to Correct

NEW YORK ( TheStreet) -- Federal Reserve board members have come out this week reiterating that markets have discounted an end to U.S. stimulus too soon.

The misconception had led to unjustified declines in Treasuries, causing yields to rise to multiyear highs.

Equity markets had been ready for a correction, following a run-up throughout 2013. When Fed Chairman Ben Bernanke said quantitative easing would probably be phased out completely by the middle of 2014, he triggered a massive selloff across all asset classes.

This week the Fed's tone has changed drastically from emphasizing time to moving back toward a data-dependent view. Fed officials claimed that the market selloff was because investors had lost sight of the data-dependent nature of the phasing-out process.

Bernanke's comments at the June Fed meeting were very explicit with regard to what the Fed hoped to do and the time frame it looked to do it in. This led to asset prices moving in the direction traders believed he was expressing, thus pricing in events likely to happen at least a year from now.

The first chart below is of PowerShares DB US Dollar Index Bullish (UUP) over CurrencyShares Swiss Franc Trust (FXF). The Swiss franc is a traditional safe-haven currency and generally experiences less volatility than other world currencies.

The dollar strengthened rapidly on the idea of a quick end to Fed easing. The dollar was driven to its upper boundaries vs. the franc, and appears to be at very overbought levels.

It remains a currency with one of the clearer outlooks relative to other global currencies, which should allow for a continued rise. Look for a moderate slowdown over the next few weeks as yields correct, but the overall trend should remain higher.

With all that the Fed officials have come out and said this week, there is now an expectation that yields will pull back in the near future. The Fed claims that markets believed that Bernanke's comments on monetary policy were hawkish, but in reality he was merely reiterating a well-known fact that when their economic targets were hit, they would reign in stimulus.
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JNK $35.30 0.17%
IEF $110.00 -0.04%
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