United States
n Country focus
Committee (FOMC)
announced on June 19 that
it would start tapering its
monthly US$85 billion
purchase of Treasuries and
agency mortgage-backed
securities (AMBS) in
response to a US unemployment rate of 6.5% or lower,
it is doubtful that it expected such a strong market
reaction to a policy it had
been discussing for months.
After the FOMC released
its official statement, yields
on the US Treasury 10-year
note jumped from a low of
1.65% to 2.75% and other
markets witnessed major
sell-offs as investors sought
refuge in the US dollar.
“After the announce-
ment, I looked at my screen,
which displays stocks,
bonds and commodities
and everything was trad-
ing in the same direction,”
Lynch market analysts pos-
ited the rotation theory in
an October 2012 research
report, which predicted that
the flight from the credit
markets likely would hap-
pen in the first half of 2013.
Driving Rhode’s argument is the inventory of
questionable corporate
paper that institutional
investors acquired when
looking for returns in an
extended low-interest rate
environment that had many
corporations jostling to
refinance themselves over
a long period at favorable
terms.
It has been a perfect
storm in the making, he
says. “With tapering, we will
come to understand the real
difference between high-
grade, high-yield and total
rubbish.”
This voyage of discovery
could happen in an environ-
ment similar to the 2007
retail mortgage-backed
securities (RMBS) market,
Rhode speculates. “All boats
that float on the credit tide,
including credit derivatives,
will sink commensurately
[due to the Great Rotation].”
Exception or rule?
When the Federal Reserve’s
Federal Open Market
n “With tapering, we
will come to
understand the
real difference
between high-
grade, high-
yield and total
rubbish.”
Will Rhode,
director of fixed
income, TABB
Group
AY-AUG 2013)
21-Jun 28-Jun 05-Jul 12-Jul 19-Jul 26-Jul 02-Aug 09-Aug
390,510,960 327,659,186 400,176,292 407,544,951 409,603,188 415,233,742 416,033,383 418,052,416
184,072,535 195,477,507 195,999,899 199,995,874 202,237,153 206,005,881 207,531,819 208,635,320
206,438,425 132,181,678 204,176,394 207,549,077 207,366,035 209,227,861 208,501,563 209,417,096
20,324,833 20,241,959 20,428,492 20,551,759 20,494,037 20,664,345 20,832,727 20,886,911
2,910,148 2,890,797 3,037,409 2,924,048 2,920,233 2,949,205 2,963,811 2,950,751
17,414,685 17,351,162 17,391,083 17,627,711 17,573,804 17,715,140 17,868,916 17,936,160
