Skip to Content
Credit Insights

Market Rallies, but We Don't See a Change in Bernanke's Policy Stance

In addition to the strength or weakness of economic and unemployment metrics in the second half of this year, technical factors in the bond market may force the Fed's hand to begin tapering.

Mentioned: , , , , , , , , ,

The average spread in the Morningstar Corporate Bond Index rallied more than 12 basis points last Thursday to +143. This rally was in response to Federal Reserve chairman Ben Bernanke's assertion that he expected the Fed would continue its highly accommodative policy for the foreseeable future. 

While the media hype sent the markets higher, we don't think there is any substantive change in his policy stance since the Q&A session following the Federal Open Market Committee meeting June 19. We think Bernanke has been crystal clear that the Fed would begin to taper asset purchases as early as this fall and end all purchases by next summer if the economy and the unemployment rate develop as the Federal Open Market Committee expects. According to the meeting minutes, it appears that the opinion to begin tapering the asset-purchase program sooner rather than later is gaining traction as "several members judged that a reduction in asset purchases would likely soon be warranted." In addition to the strength or weakness of economic and unemployment metrics in the second half of this year, technical factors in the bond market may force the Fed's hand to begin tapering. The government's monthly deficit has been declining as a result of increased tax revenue, reduced spending increases from sequestration, and dividend payments from Fannie Mae (FNMA) and Freddie Mac (FMCC). As such, the Treasury will not need to issue as much debt in the second half of this year and there will be less debt issued for the Fed to monetize. Considering that the Fed already owns a substantial amount of long-dated Treasuries, it will become increasingly harder for the Fed to source bonds, causing even greater problems in the Treasury repo market.

To view this article, become a Morningstar Basic member.

Register for Free

David Sekera does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.