Thursday, June 19, 2014

What Janet Yellen is Sellin'

Yellen, in her remarks yesterday, Wednesday June 18, was sellin’ “nothing new.”  Ms. Yellen reiterated that the central bank expects to keep interest rates at these levels for a considerable time so as to support the economy. This time, however, she did not make the mistake of providing a specific time frame, so the mention of 2015 or 2016 declares, in my opinion, that they are unsure of when this economy will be strong enough to withstand a rate rise.

On the other hand, as we have mentioned before, the Fed will have a balance sheet, at the end of the tapering, of about $4.75 trillion.  If the Fed does not deleverage, then these funds will surely be utilized to lower the US borrowing cost by lowering long-term rates.  In addition, this should continue to help bolster or aid the housing market.  The U.S.’s  10-year bond yield of 2.58% is 22% higher than that of Slovakia’s 10-year bond and 29% higher than France’s 10-year rate.  From a relative value point of view, the US appears very attractive, and with the ECB keeping Europe’s yields low, it is difficult to fathom a spike in US rates at this time.  Once again,  Ms. Yellen is selling “nothing new”—except continued low rates.

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