The Fed is preparing gradual steps towards the exit. This will lead to changes !!!! $TLT

• The lesson from 2003-04 was that the first shifts in Fed rhetoric did not spook
markets. A combination of strong employment numbers and more hawkish Fed
rhetoric in the spring of 2004 did, nevertheless, lead to a significant rise in yields.
• Once again, employment numbers take centre stage when gauging the outlook
for bond markets.
• Recent signals from job markets have been mixed, but a model weighing a range
of signals indicates that employment numbers are set to rebound in the months
ahead.

During Bernanke’s semi-annual testimony to Congress, he reiterated that rates could
remain low for an “extended period”, thus signalling that the recent hike in the discount
rate did not indicate that a hike in the Fed Funds rate was imminent. In the months ahead,
markets could be very sensitive to changes in Fed rhetoric, as the unwinding of MBS
purchases will begin on 31 March (see A roadmap for the Fed’s exit for further details.).
The FOMC statements from the 2003-04 period – when the Fed was preparing a shift
from very low rates – serve as an interesting case study of the potential market impact of
shifts in Fed rhetoric.





Bond markets and Fed rhetoric -