End of Days

The Fed let the markets have it with both barrels. Although the shots will be largely ineffectual for economic growth, they could prove damaging for certain fixed income vechicles, Libor Floaters. Why Libor floaters you ask? Because the yield curve will steepen. What the Fed is doing is potentially inflationary. Although continued twisting will buffer the rise of long-term rates, there could be upward pressure on long-term rates. However, the Fed will ensure that short-term rates are anchored at very low levels. Since Libor is sensitive to the Fed Funds rate, it, and coupons which adjust off of Libor, will also be low. Investors who believe that higher Fed rates are not too far off had better read the text of the Fed statement which read: “To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.” This means that, unless the economy gains traction more quickly than anticipated and/or a more hawkish Fed Chairman succeeds Mr. Bernanke in 2014, Fed Funds and Libor will remain low for a long time. The same might not be true for longer-term rates if the Fed is willing to keep policy accommodative even as the economy gains traction “for a considerable time.” To make a long story short: Libor Floaters have had their day in the sun.