Yield on the U.S. 10-year treasury dropped to 2.864 percent on today’s market in response to the withdrawal of Larry Summers from the Fed chairman race. Summers seemed the most likely pick for Federal Reserve Chairman just a few weeks ago, and his reputation led to a belief that the Central Bank would follow a harsher policy next year.
His withdrawal from the race has made it more likely that the Federal Reserve will continue soft policies next year. In a new report, Royal Bank of Scotland analyst John Briggs takes a look at what the change in the chairman race means for his cross asset outlook.
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Fed Treasury effect
According to Briggs, the yield on a 10-year Treasury could fall to as low as 2.40-2.45 percent. In recent days, Treasuries were trading with a yield of as much as 2.99 percent. The increasing certainty with regard to Fed policy and the reassuring assumption that policy will be easier next year should drive down uncertainty and lower bond prices.
Aside from sovereign bonds, Briggs takes a look at corporates. In his estimation, Investment Grade and High Yield corporate debt will both perform well over the coming month, although high yield offers better returns, according to Briggs. Non-agency Mortgage backed securities are also rated a buy, and so are certain emerging market countries.
According to Briggs, the Summers news should remove a lot of the pressure on the currencies of emerging market nations. This means that using the U.S. dollar as a bet against those currencies may no longer be a good idea, as Briggs had advised in his last report.
Federal Reserve rally
The federal Reserve will hold its September meeting tomorrow and Wednesday. At the meeting, the central bank will decide whether to drop the magnitude of the quantitative easing program. With Ben Bernanke leaving his post in the first days of next year, the markets are just as concerned with what his successor will do, as with what he plans on doing Wednesday.
Traders are now betting that the Federal Reserve will have a softer policy through 2014. The front-runner for the news post is Janet Yellen. She is currently the Vice Chairman of the Central Bank. She is seen as a dovish alternative to Summers, and her selection would almost certainly be welcomed by traders hoping for Fed activity to remain at a high level.