The Buffalo Springfield song refrain, “…what’s that sound, everybody look what’s going down” applies as much to the financial markets of today as it did to life in 1967.
We seem to have reached a tipping point where investors and traders are intent upon stealing the Fed’s thunder and have begun to drive interest rates higher on their own. In my view, bearish talk and sentiment have led to the selling of mutual fund shares, which has led to the selling of cash bonds, pushing prices lower and yields higher.
Because a large portion of the muni market is owned by retail investors who are sensitive to these issues, mutual fund and ETF price declines have the potential to force even more selling.
“What’s going down” is more than just prices. I believe several factors are likely at work in pushing this anxious market to act before the news is actually on the tape: a sea change in overall sentiment, talk of the rotation out of bonds into stocks and the subsequent performance of these securities and, lastly, the possibility that the Fed will scale back its quantitative easing policy. Where does this leave concerned investors?