Thursday, October 1, 2015

JUNK BONDS | How "Terrifying" Should They Be? Notes for FOMC Meeting

Bears to be released from their
cages at the end of October?
On the one hand, some calm voices are reassuring us that the recent downturn in the stock market is historically followed by a recovery. Usually.

On the other, we hear concerns that the sky above the financial markets is about to fall. Junk bonds are viewed as "terrifying" because they have grown so fast in an environment of zero-bound Federal Reserve interest-rate policies.

The fear is that the second rates do start to go up catastrophe may be waiting. Although the expected increase has been continually postponed because the time is not ripe, we have been told that it is likely to happen before the end of 2015.
A zero-interest FOMC diet for bulls
is like spinach for Popeye.

What worries me is that so many people with money are focused intently on the coming rise in interest rates. It has been such a long, long time on Easy Street, when the market bears confined by the assurance provided by a zero-interest bank environment. The possible global market reaction to higher (i.e., positive real) Fed fund rates is scary.

Better a finger tip than an arm.
The Fed, which has been largely sidelined since 2008 by its need to provide liquidity to the panicked financial markets, will feel powerful again when it starts its next upward climb in interest rates.

I hope that, if the upward march of interest rates starts at the next FOMC meeting on October 27-28, the Fed begins with the smallest possible increase. Better a finger tip bitten off than a whole arm.