U.S. equity and Treasury ETFs rallied to start the week after Larry Summers dropped out of the running to replace Ben Bernanke as Federal Reserve chairman.
However, stock and bond ETFs should be volatile this week as investors look ahead to the Federal Reserve two-day policy meeting, followed by the announcement on Wednesday. [Bond Bulls Could Roar on Summers Withdrawal]
“This week, investors will be fixated on the September Fed meeting and whether (and to what degree) they taper their bond-buying activity at the end of their two-day meeting on Wednesday. The current consensus among most economists polled by Reuters is for the Fed to reduce its monthly bond purchases by $10 billion to $75 billion: a ‘taper-lite scenario,” PiperJaffray said in a note Monday. [ETF Investors Bet On ‘Taper Lite’]
“We believe global markets have risen over the past several weeks on a combination of improving economic data in the U.S. and anticipation of a taper-lite announcement at September’s Fed meeting,” it said. “Additionally, a taper-lite announcement would provide enough stimulus to keep equity markets happy while also ensuring the benchmark 10-year bond yield does not rise too quickly. In our opinion, the Fed will do nothing to disrupt this equity bull market and they will not be quick to pull away the proverbial punch bowl and risk the economy slipping back into a recession.” [iShares: Get Ready for ‘Taper Lite’ as Labor Market Isn’t Picking Up]
Yields on 10-year Treasury notes dropped below 2.8% Monday on the Summers news after touching 3% earlier this month. The iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) gained 0.7% at last check. Bond prices and yields move in opposite directions.