Although the Greek situation is far from resolved, many market participants cheered the results of yesterday’s confidence vote for the nation’s Prime Minister. Most took it as a sign that one of the biggest hurdles to the country’s bailout has been cleared, sending safe haven assets plunging on the day. However, the real test is next week when the country’s Parliament votes on further austerity measures in order to help secure another round of bailout funds from the richer EU members. Until then, investors are likely to focus in on today’s crucial Federal Reserve meeting in order to give markets, and especially T-Bonds, guidance to close out the week.
Due to the Greek crisis, T-bills have been performing quite well as the dollar has strengthened, limiting the appeal of gold and other metal-based havens. Yet, this could change very quickly after the conclusion of today’s Fed meeting, as investors could see large move in the Treasury market if Bernanke signals one way or another on the economic situation. In large part from this Greek issue and the general slowdown in the American economy, many investors are now anticipating that Bernanke’s bond buying program– popularly known as QE2– will likely stay on the Fed’s balance sheet for quite sometime and the central bank will hold off on unwinding its massive position. In fact, according to a recent poll by Bloomberg, 78% of the economists surveyed expect the balance sheet to remain at current levels until at least October, compared with just 52% before the Fed’s last meeting [Embrace QE With These Three ETFs].
This speculation over further bond buying by the Fed looks to dominate today’s meeting and especially the press conference that will immediately follow. Traders will hone in on any comments regarding this development, especially considering the increasingly poor economic situation in the U.S. on both the employment and industrial fronts. “The press conference is…likely to be watched to for comments in regards to QE3,” said Brown Brothers Harriman in a research note. “We continue to think the bar is set very high on this front and expect him to repeat that the balance of risk is not in favor of further asset purchases.” Any news on this could sink the markets as it would signal to many that the economy is in even worse shape than initially thought. As a result, most expect the status quo to be maintained in terms of rate expectations and the Fed’s balance sheet, at least for the time being, but don’t rule anything out at today’s event [also see QE2 Slaughters Long-Term Treasury ETFs].
Thanks to this key meeting and its likely impact on rate expectations, investors should look for the iShares Barclays 20 Year Treasury Bond Fund (TLT) to remain in focus throughout the session. The fund tracks the Barclays Capital U.S. 20+ Year Treasury Bond Index, measuring the performance of U.S. Treasury securities that have a remaining maturity of at least 20 years. Thanks to this focus, the fund has an extremely long duration and is very sensitive to interest changes, suggesting that events later today could greatly impact prices for the vast majority of securities in this fund [see more on TLT's fact sheet].
So far in 2011, TLT has risen modestly thanks to increased worries over the European debt crisis and other bond investors seeking higher yields than what is currently being offered in the short-term slice of the market. As a result, TLT is up 2.5% since the beginning of January and has gained 3.2% in the past quarter alone, all the while paying out a robust yield of 4.1%. Should the Greek crisis deteriorate or if Bernanke signals a rate hike sooner rather than later, TLT could continue its recent strength with a strong performance on the day. If, however, Bernanke even hints at another round of QE to boost the economy, investors could see a sharp sell-off in TLT as it could signal to many investors that the economy is extremely weak and that Bernanke has no plans to unwind the Fed’s huge balance sheet anytime soon, potentially pushing the dollar down as well and sending more cash into the relative safety of gold instead [see more charts of TLT here].
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Disclosure: No positions at time of writing.