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Fixed Income Markets Wising Up to QE Tricks
A look at fixed income returms during QE-era subperiods.
Howard L. Simons     

One of the many enduring mysteries of Wall Street is why fixed income traders regard themselves as being more erudite and sophisticated than equity traders. I long have suspected the reason behind this narcissism is that equity traders are working with an embedded call option and tend to focus on maximizing gains, whereas fixed income instruments have more limited upside and attract investors who are focused more on capital preservation and current income versus getting drunk and rowdy en route to a general good time.

Worse, fixed income traders regard their equity brethren as a collection of mouth-breathing rubes who simply have been lucky during the QE era. I noted last month that QE was nowhere near as important to equity returns as commonly believed. In fact, all of the hints, winks, raised eyebrows, leaks to favored reporters of major business newspapers, grunts before Congressional committees, and FOMC-member speeches before local Rotary Clubs have failed to produce statistically different returns since the taper-talk era began in May 2013. Moreover, all of this communications folderol has been decreasingly important since August 2012.

Fed Zigs, Bond Markets Zigs, Too: No Zags Here, Sir!

The same could not be said for fixed income markets, whether we were dealing with fixed income markets such as 7- to 10-year Treasuries, investment-grade corporate bond, or high-yield bonds prior to the actual commencement of tapering in December 2013.

Let's use the same methodology employed for analyzing the importance of QE to equities. To refresh, we can classify the QE era into 13 different periods; the current one began on December 18, 2013 with the first tapering of QE and presumably will continue until the mortgage-backed security and Treasury bond-buying program hits zero. We then can calculate the daily returns for the fixed income markets noted above across all 13 of these regimes. The dates of these periods and their means and standard deviations are presented below along with a probability that each period is different statistically from the previous one.

The data in all three markets show very clearly how the fixed income markets took the taper bait in Period 11, May-September 2013. Returns were negative and were very different from those of Period 10, December 2012-April 2013, with the high-yield market's probability of difference reaching a night-and-day 98.8%. They then took the taper-postponement bait in Period 12, September-December 2013, with equal enthusiasm.

Once tapering began in December 2013, with an apparent intention of moving toward ending the whole QE era sometime in late 2014, fixed income returns remained positive. The same self-proclaimed Masters of the Universe who ran face-first into the wall during Period 11 have kept returns positive during the current Period 13.

Another way of looking at this is the bond traders reached the same conclusion the stock traders did as far back as August 2012, but only after chasing their tails every time they got the signal to do so. They get paid handsomely for such herding behavior even when bond investors lose money as they did in 2013. Let's hope this early evidence of discriminating behavior in Period 13 continues.

The test results are presented below in tabular form.





No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

More From Howard L. Simons
Fixed Income Markets Wising Up to QE Tricks
A look at fixed income returms during QE-era subperiods.
Howard L. Simons     

One of the many enduring mysteries of Wall Street is why fixed income traders regard themselves as being more erudite and sophisticated than equity traders. I long have suspected the reason behind this narcissism is that equity traders are working with an embedded call option and tend to focus on maximizing gains, whereas fixed income instruments have more limited upside and attract investors who are focused more on capital preservation and current income versus getting drunk and rowdy en route to a general good time.

Worse, fixed income traders regard their equity brethren as a collection of mouth-breathing rubes who simply have been lucky during the QE era. I noted last month that QE was nowhere near as important to equity returns as commonly believed. In fact, all of the hints, winks, raised eyebrows, leaks to favored reporters of major business newspapers, grunts before Congressional committees, and FOMC-member speeches before local Rotary Clubs have failed to produce statistically different returns since the taper-talk era began in May 2013. Moreover, all of this communications folderol has been decreasingly important since August 2012.

Fed Zigs, Bond Markets Zigs, Too: No Zags Here, Sir!

The same could not be said for fixed income markets, whether we were dealing with fixed income markets such as 7- to 10-year Treasuries, investment-grade corporate bond, or high-yield bonds prior to the actual commencement of tapering in December 2013.

Let's use the same methodology employed for analyzing the importance of QE to equities. To refresh, we can classify the QE era into 13 different periods; the current one began on December 18, 2013 with the first tapering of QE and presumably will continue until the mortgage-backed security and Treasury bond-buying program hits zero. We then can calculate the daily returns for the fixed income markets noted above across all 13 of these regimes. The dates of these periods and their means and standard deviations are presented below along with a probability that each period is different statistically from the previous one.

The data in all three markets show very clearly how the fixed income markets took the taper bait in Period 11, May-September 2013. Returns were negative and were very different from those of Period 10, December 2012-April 2013, with the high-yield market's probability of difference reaching a night-and-day 98.8%. They then took the taper-postponement bait in Period 12, September-December 2013, with equal enthusiasm.

Once tapering began in December 2013, with an apparent intention of moving toward ending the whole QE era sometime in late 2014, fixed income returns remained positive. The same self-proclaimed Masters of the Universe who ran face-first into the wall during Period 11 have kept returns positive during the current Period 13.

Another way of looking at this is the bond traders reached the same conclusion the stock traders did as far back as August 2012, but only after chasing their tails every time they got the signal to do so. They get paid handsomely for such herding behavior even when bond investors lose money as they did in 2013. Let's hope this early evidence of discriminating behavior in Period 13 continues.

The test results are presented below in tabular form.





No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

More From Howard L. Simons
Daily Recap
Fixed Income Markets Wising Up to QE Tricks
A look at fixed income returms during QE-era subperiods.
Howard L. Simons     

One of the many enduring mysteries of Wall Street is why fixed income traders regard themselves as being more erudite and sophisticated than equity traders. I long have suspected the reason behind this narcissism is that equity traders are working with an embedded call option and tend to focus on maximizing gains, whereas fixed income instruments have more limited upside and attract investors who are focused more on capital preservation and current income versus getting drunk and rowdy en route to a general good time.

Worse, fixed income traders regard their equity brethren as a collection of mouth-breathing rubes who simply have been lucky during the QE era. I noted last month that QE was nowhere near as important to equity returns as commonly believed. In fact, all of the hints, winks, raised eyebrows, leaks to favored reporters of major business newspapers, grunts before Congressional committees, and FOMC-member speeches before local Rotary Clubs have failed to produce statistically different returns since the taper-talk era began in May 2013. Moreover, all of this communications folderol has been decreasingly important since August 2012.

Fed Zigs, Bond Markets Zigs, Too: No Zags Here, Sir!

The same could not be said for fixed income markets, whether we were dealing with fixed income markets such as 7- to 10-year Treasuries, investment-grade corporate bond, or high-yield bonds prior to the actual commencement of tapering in December 2013.

Let's use the same methodology employed for analyzing the importance of QE to equities. To refresh, we can classify the QE era into 13 different periods; the current one began on December 18, 2013 with the first tapering of QE and presumably will continue until the mortgage-backed security and Treasury bond-buying program hits zero. We then can calculate the daily returns for the fixed income markets noted above across all 13 of these regimes. The dates of these periods and their means and standard deviations are presented below along with a probability that each period is different statistically from the previous one.

The data in all three markets show very clearly how the fixed income markets took the taper bait in Period 11, May-September 2013. Returns were negative and were very different from those of Period 10, December 2012-April 2013, with the high-yield market's probability of difference reaching a night-and-day 98.8%. They then took the taper-postponement bait in Period 12, September-December 2013, with equal enthusiasm.

Once tapering began in December 2013, with an apparent intention of moving toward ending the whole QE era sometime in late 2014, fixed income returns remained positive. The same self-proclaimed Masters of the Universe who ran face-first into the wall during Period 11 have kept returns positive during the current Period 13.

Another way of looking at this is the bond traders reached the same conclusion the stock traders did as far back as August 2012, but only after chasing their tails every time they got the signal to do so. They get paid handsomely for such herding behavior even when bond investors lose money as they did in 2013. Let's hope this early evidence of discriminating behavior in Period 13 continues.

The test results are presented below in tabular form.





No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

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