The talk of Wall Street right now is the perplexing performance of bonds. So far in 2014, bond prices have climbed and along with that, bond yields have declined fairly significantly. Now it appears that the Federal Reserve is modifying the models it uses to analyze the effects of interest rates and monetary policy. The change is due to the unprecedented monetary policy of the past five years that has apparently rendered historic models less useful (see article in link).
What’s the point? We think there are some fairly obvious reasons for why bonds are behaving as they are: 1) a growing perception that global growth may be slower than many had expected, and 2) increased global geopolitical tensions that is drawing money to “safe haven” U.S. Treasuries. What is more interesting is the Federal Reserve altering its models to adjust to a new interest rate paradigm. It implies that the models used for the past 60 years may not be working and that we may be in an extended “new paradigm” for the economy, that of slower secular growth. It also implies that the Fed may have to further re-think its monetary policy and the mechanisms its uses to transmit that policy into the economy.
Link: http://money.msn.com/business-news/article.aspx?feed=BLOOM&date=20140602&id=17666410