When Patience Disappears

Advance notice of the timing of a rate hike by the Federal Reserve may hinge on the removal of just one word, warns St. Louis Fed President Bullard.

February 13, 2015    |    By Scott Minerd

Global CIO Commentary by Scott Minerd

Market observers keen to anticipate the Federal Reserve’s next move are wise to follow the trail of verbal breadcrumbs laid down by St. Louis Fed President James Bullard, a policymaker I hold in high regard. When Fed policy seems uncertain or even inert, Dr. Bullard’s public statements have historically been a Rosetta stone for deciphering the Fed’s next move.

For example, in July 2010, Bullard wrote in a report ominously titled “Seven Faces of the Peril” that it was evident the Fed’s first round of quantitative easing had not been sufficient to stimulate the economy. In the report, which was widely picked up by the financial press, Bullard warned about the specter of deflation in the U.S. economy, and that the U.S. was “closer to a Japanese-style outcome today than at any time in recent history.”

I expect rates will trend higher in the second half and the #Fed will move in September.


That summer, months ahead of any Fed decision to proceed with QE2, it was Bullard who began a drumbeat of steady public messages about the necessity of a second round of easing. By August, the Fed was not talking about whether it should implement a new round of QE, but how. In November 2010, the Fed announced its plan to buy $600 billion of Treasury securities by the end of the second quarter of 2011. If you followed Bullard, you were expecting it.

While Bullard is not a voting member of the Federal Open Market Committee this time around, I still view him as an important policy mouthpiece. That is why it was so interesting when he underscored Fed Chair Janet Yellen’s comments at a press conference following the committee’s Dec. 16-17 meeting in an interview with Bloomberg, saying that the disappearance of a specific word—“patient”—from the Fed’s statement may be code that a rate increase will come within the next two FOMC meetings. He reiterated the point in a subsequent speech, saying “I would take [“patient”] out to provide optionality for the following meeting…To have this kind of patient language is probably a little too strong given the way I see the data.” When Bullard, the man who told us months in advance to expect QE2, goes to great length to describe when the Fed will raise rates, I tend to pay attention.

While Bullard says the Fed could raise rates by June or July (and I wouldn’t rule that out), I think the likelihood is closer to September and that the central bank will likely raise rates twice this year. Whenever “lift off” actually occurs, we’ve long been anticipating that this day would come. It is a particularly interesting time for investors to consider increasing fixed-income exposure to high quality, floating-rate asset classes, such as leveraged loans and asset-backed securities. The good news is there is still time to prepare for when the Fed finally runs out of patience.

Historical Outperformers During Periods of Rising Rates

With the first Fed rate hike drawing closer, floating-rate credit securities look set to offer more attractive returns. During the last three periods of rising interest rates (1994, 1999-2000, and 2004-06), floating-rate securities delivered higher average total returns than traditional fixed-income securities.

Average Returns During Periods of Rising Interest Rates*

Source: Bank of America Merrill Lynch, Barclays, Credit Suisse, Guggenheim Investments. *Note: Periods of rising rates are defined as a cumulative change of the three-month Libor rate in excess of 100 basis points, and excludes the 2007-2008 financial crisis. Data as of 2/10/2015. Performance displayed represents past performance, which is no guarantee of future results. Performance will vary over different market cycles. Index information is provided for illustrative purposes only and are not meant to represent the performance of any product or strategy. Referenced indices are unmanaged and not available for direct investment. Index returns do not reflect any management fees, transaction costs or expenses.

Economic Data Releases

U.S. Payrolls Report Strong Across the Board

  • Nonfarm payrolls beat expectations in January, up 257,000. The prior two months were revised up by a combined 147,000 after annual benchmark revisions. January showed strong gains in construction, retail, and healthcare.
  • The unemployment rate rose in January to 5.7 percent due to the labor force participation rate improving to 62.9 percent.
  • Average hourly earnings surprised to the upside in January, rising 0.5 percent from December. The annual growth rate rose to 2.2 percent, the highest since August.
  • Job openings rose to 5.03 million in December from 4.85 million, and the opening rate reached the highest level since 2001. The hire rate also increased while the quit rate remained unchanged.
  • Initial jobless claims rose to 304,000 for the week ending Feb. 7, up 25,000 from the prior week.
  • Retail sales disappointed in January, down 0.8 percent following December’s 0.9 percent decrease. Sales excluding autos, gas, and building materials were also under expectations at 0.1 percent.
  • The NFIB Small Business Optimism Index unexpectedly declined in January, down from 100.4 to 97.9 and the percentage of firms planning to increase employment ticked down to 14 percent.

Euro Zone Data Muddles Along, China Trade Data Worrying

  • Industrial production in the euro zone was flat in December, under expectations after three months of increases.
  • German industrial production inched up in December by 0.1 percent, matching November’s gain.
  • German exports rebounded strongly in December, rising 3.4 percent.
  • French industrial production had the best monthly growth in 13 months in December, rising 1.5 percent.
  • Industrial production in the U.K. decreased 0.2 percent in December, causing output to fall to a four-month low.
  • Chinese trade data was much worse than expected in January, with exports down 3.3 percent year over year and imports plunging 19.9 percent.
  • China’s Consumer Price Index dropped to 0.8 percent year over year in January, while the Producer Price Index plunged further to -4.3 percent due to lower commodity prices.
  • Japan’s Economy Watchers survey showed slight improvements in January, with both the current and outlook indices rising.


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2022’s Upside: The Fed Has Put the Income Back in Fixed Income 

2022’s Upside: The Fed Has Put the Income Back in Fixed Income

Anne Walsh, Chief Investment Officer for Fixed Income at Guggenheim Investments, joined Asset TV to discuss macroeconomic conditions, risk, and relative value in the bond market.

Macro Markets Podcast 

Macro Markets Podcast Episode 26: Mortgage-Backed Securities, Structured Credit, Market Liquidity

Karthik Narayanan, Head of Securitized for Guggenheim Investments, discusses value in the residential mortgage-backed securities market and other ABS sectors. Anne Walsh, Chief Investment Officer for Fixed Income, answers a listener question on liquidity. Jerry Cai, an economist in our Macroeconomic and Investment Research Group, brings the latest on the labor picture and an update on China.

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