The numbers don't matter, or perhaps they just don't add up!
Over the past several years, the actions of the Federal Reserve have dominated the financial landscape. Arguably, the Fed’s actions have also played a significant behind-the-scenes role in economic improvement.
This is more than obvious to equity market watchers. What has stunned investors thus far in 2014 are two things: the bond markets, and the candid behavior of new Fed Chair Janet Yellen.
First, let’s address the yield issue on bonds. The beginning of the year ushered in a 10-year US Treasury yield of 3 percent and a presumed belief that interest rates would have to rise as the Federal Reserve began to taper its purchasing of US Treasury bonds.
Simple economics suggest that the Fed was supplying the demand for the bonds, thus driving their prices higher and their yields lower. Decreased demand driven by the taper should result in lower bond prices and rates spiraling higher.
Should-a, would-a, could-a — but that's not what happened! The 10-year Treasury increased in value as rates fell.
This surprise has baffled the best of the best. Bill Gross’s PIMCO fund has just seen 11 consecutive months of outflows as the bond market continues to make even the smartest and most experienced traders scratch their heads in disbelief.
Based on a CNBC report, PIMCO’s Total Return Fund will end the first quarter in the bottom 87 percent of similar funds. Will Gross be wrong forever? Probably not. There is obvious confusion in the marketplace.
The Federal Reserve previously implied they would change their low-to-zero rate policy as soon as they saw economic improvement and unemployment numbers dropped to a certain number. For some background, back in the late 1970s the Fed was tasked with the responsibility of setting appropriate price appreciation (code for controlling inflation) and driving the economy toward full employment.