Magazine article Global Finance

Fed Uncertainty Rattles High-Yield Bonds

Magazine article Global Finance

Fed Uncertainty Rattles High-Yield Bonds

Article excerpt

High-yield corporate bond issuance and trading have slowed considerably in the face of uncertainty about Federal Reserve monetary policy, at a time when chairman Ben Bernanke is about to hand over the reins to Janet Yellen, who is currently vice chair of the board of governors of the Federal Reserve System.

US high-yield debt issuance totaled $26.3 billion in October, well below the record $46.5 billion set in September, according to KDP Investment Advisors. Trading activity has also dried up, in part because of higher bank capital requirements set by the Basel Committee on Banking Supervision.

The impact of the US government shutdown and short-term extension of the debt ceiling has complicated policymaking for the Fed by disrupting data and data releases and creating a greater level of uncertainty about the nearterm path of the economy, says John Stopford, co-head of Investec Asset Management s global multi-asset team.

In the near term, Investec expects 10-year Treasury yields to stay mainly in a 2.5% to 3% range. "The direction of yields over time, however, should be a gradually rising trend as the US economy moves closer to full employment," Stopford says. This assumes that the Federal Open Market Committee (FOMC) is heading toward an eventual neutral level for the federal funds rate of about 4%. Stopford adds that some of the more dovish members of the committee doubt the rate will get much above 3%, even in the long term.


The FOMC may consider it prudent to delay tapering further until the economic picture is clearer, Stopford says. …

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