Are Treasuries Poised To Rally?

Fed chairs are under intense scrutiny for their utterances. I can remember an interview with Paul Volcker who said that he felt so much under the microscope that when he went out to a restaurant, he felt compelled to say, "I'll have the steak, but that doesn't mean that I don't like the chicken or the lobster."

In the wake of Janet Yellen's uttering the phrase "around six months", both stock and bond markets sold off. While the major equity averages rallied the next day to recover virtually all of their losses, the Treasury market remained mired in the red compared to pre-FOMC announcement levels as of the close on Thursday.h2 Most analysts were either neutral or dovish/h2

So was the market sell-off an overreaction to what amounted to a rookie mistake? Most of the analysis that I've read had a neutral or slightly dovish take to the FOMC statement and Yellen press conference. Here are some examples:

Bill McBride of Business Insider ):

...we still think that rate hikes are far off. First, we do not think that Yellen meant to send a strong signal of a shift in the reaction function. Second, while we agree that the most likely path for growth is a pickup to a 3%+ pace, the risk to this forecast is on the downside. Third, we expect a more gradual return to 2% inflation than the FOMC. Fourth, we see a significant risk that a tightening of financial conditions in the run-up to the first rate hike will delay the first hike, much as last summer's "taper tantrum" delayed the actual move to QE tapering.

Our central forecast for the first hike remains early 2016, although the risks now tilt in the direction of a slightly earlier move.

To summarize, the consensus is that the market over-reacted to the downside. If that's the case, watch for Fed officials scrambling to get into damage control mode in the days and weeks to come.

If I am right on that score, watch for the Treasury market to rebound - and soon.

Disclosure: Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). The opinions and any recommendations expressed in the blog are those of the author and do not reflect the opinions and recommendations of Qwest. Qwest reviews Mr. Hui’s blog to ensure it is connected with Mr. Hui’s obligation to deal fairly, honestly and in good faith with the blog’s readers.”

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this blog constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or I may hold or control long or short positions in the securities or instruments mentioned.

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Written By: Cam Hui