When the Name Is Bond, High Yield Bond

If you think the Federal Reserve is contemplating tapering its $85B-a-month bond-buying program, think again. Three prominent Fed members yesterday stated unequivocally they're leaning toward more stimulus, not less.

Their attention is focused on the slow rate of U.S. jobs growth, which is the slowest of any post-war recession. In fact, the forecasts of 66 economists tracked by Bloomberg indicate unemployment may remain above 6.5 percent through the early half of 2015. This may explain why Fed Chairman Ben Bernanke changed course at the September FOMC meeting, abandoning the taper plan first floated on May 22 and instead conveying "highly accommodative policy" for longer.

Bond traders responded in unison to the changes, first in May and then again in September.

High yield bond volumes started falling significantly in May when the Fed announced its intention to trim its bond purchases -- don't fight the Fed. Then traders reversed course in September and plowed back to the market.

Curiously though, yields haven't yet caught up. The Barclays High Yield Bond Index currently yields 5.66 percent, compared with 4.95 percent in early May. With trading volume returning to the bond market and the Fed hinting at the possibility of more stimulus rather than less, high yield bonds may have more room to run.

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.