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Are We at a Turning Point in Monetary Policy?

Your Money: Turning point for fixed-income investors

Erin E. Arvedlund Published Wednesday, September 18, 2013 (Inquirer.com Sub required)

The Federal Reserve meetings this week could represent a turning point in American monetary policy, say professional fixed-income advisers. So for fixed-income investors, it’s time to re-examine your holdings.

It is possible the Fed will choose to wait until November, after the October Federal Open Market Committee meeting, to begin reducing the current pace of purchases at $40 billion in mortgage-backed securities and $45 billion in Treasuries per month.

Fixed-income strategist Guy LeBas, of Janney Montgomery Scott, believes the committee “will use this opportunity to codify the plans laid out on June 19, meaning the statement will reference the goal of finishing its asset purchases by mid-2014.”

UBS wealth advisor John Garvey is encouraging clients to stick with liquid, single-A-rated munis that can offer yields of 3 to 3.5 percent, tax free, compared with roughly the same yield on 10-year Treasuries.

“There’s a greater than 50 percent probability on Wednesday that the Fed starts withdrawing its bond-buying of [Treasuries] by $10 billion to $15 billion a month as a start,” and probably won’t finish drawing down the stimulus program until mid-2014, Garvey said in an interview at UBS in Center City.

Garvey says he advises clients to avoid riskier issuers such as Puerto Rico and Illinois, and has been selling shorter-term municipals in the one- to three-year maturity range and swapping into 10- to 15-year maturities.

UBS also invested for clients in corporate issuers like the Verizon/Vodafone bonds that recently came to market (with the caveat that UBS has had a longtime relationship with Vodafone), as well as municipal bonds.

The meetings this week don’t guarantee the Fed will immediately start raising interest rates. UBS’s house view is that the Fed won’t raise rates until 2015.

LeBas agrees that the Fed’s Open Market Committee meetings could represent the fulcrum for a change in monetary policy, just as Fed Chairman Ben Bernanke is set to step down at the end of the year.

“The two-day September FOMC meeting will be . . . the likely inflection point in current monetary policy,” LeBas wrote in a note to clients. “Given the mixed summer economic data, the committee is apt to codify the plans announced on June 19 and remind the market that the 6.5 percent unemployment rate threshold for the Fed funds target rate is a guide, not a trigger, while waiting until November to alter the pace of purchases.”


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