No Taper? No Problem

When the US Federal Reserve gave indications in the summer that it would begin scaling back on its $85 billion/month bond-buying program - known as quantitative easing (QE), financial markets were quick to react. Market watchers were confident that if the economic recovery in the US continued to show signs of improvement, the Fed’s tapering decision would be a certainty come Fall. In reaction, bond yields started rising: the 10 year Treasury bond rose 110 basis points from April until September.

When it came time to make an announcement, the Fed delivered a surprise. Chairman Ben Bernanke indicated QE would continue, rather than tapering which most had expected. Many began to provide explanations for the Fed’s decision, pointing to weakness in US labour market reports, low inflation numbers, and the rise in long-term rates after the Fed’s previous policy meeting – which is when the tapering speculation began.

The rise in yields was especially pronounced further along the yield curve. In other words, the longer-term interest rates rose more than intermediate rates, which rose more than short-term rates, which did not rise much at all. Due to the inverse relationship between rates and bond prices, the intermediate to long-term bond prices plummeted as yields rose. Some investors with enough liquidity were able to take advantage of this. They invested in bonds with solid corporate fundamentals that had been temporarily mispriced by the market’s reaction. This also meant that equity sectors such as utilities, REITS, telecommunications, and consumer staples suffered a sell-off: yield-seekers moved out and into the bonds now providing higher yields. Despite rough times for these sectors, growth stocks have done well in the US.

During times of rising volatility, the dispersion among asset classes like bonds and equities has historically risen as well. However, this relation has not held for some months now. Since reaching a high in June, equity market volatility remains low while dispersion remains high. This can potentially present attractive investment opportunities.

Some of these opportunities may include Europe. The European situation has shifted to “slightly improving”, with many stocks priced as bargains when compared to their US counterparts. With an expansion in consumer activity, manufacturing, and corporate sentiment, Europe could provide many classic “buy low” opportunities.

The financial advisors at GTA Wealth Management Inc. will help you select investment solutions that meet your risk tolerance and target investment opportunities. The GTA Wealth financial advisors will also assist in making sure you have a tax efficient investment plan.