April 2010 Federal Open Market Committee Meeting Recap

SEI Global Fixed Income Management manages fixed-income strategies for SEI’s Managed Account Program (MAP) and Integrated Managed Account Program (IMAP).

Welcome, my name is Sean Simko. I am Managing Director of SEI Global Fixed Income Management. Today’s commentary will focus on the April 28 meeting of the Federal Open Market Committee, or FOMC, including the release of the Committee’s statement and the market’s initial reaction.

The FOMC concluded its scheduled two-day closed-door meeting on Wednesday and as expected, the Committee left the lending rate unchanged, holding it in the range of zero to 25 basis points. The Committee also provided a statement that was similar to its last one. The release of the statement was pretty much a non-event, which was a nice change of pace from recent sovereign debt concerns. There were a few minor upgrades—one of which was a reference to improvement in the labor market, which was modest at best. It felt like a token statement added in response to last month’s payroll gain of 162,000 jobs. The Committee decided to keep the language about keeping the federal funds rate “exceptionally low” for an “extended period,” reassuring market participants. Despite some expectations to the contrary, Kansas City Fed President Thomas Hoenig was again the sole dissenter in recommending changing the “extended period” language. However, recent data allows the Fed to remain in a holding pattern until improved sustainable trends materialize. The fact that inflation expectations remain contained and that inflationary trends continue to trend lower provide the Fed with the ability to remain in “wait and see” mode.

The trading days preceding the FOMC meeting were not filled with speculation surrounding a change in Fed rhetoric but instead with testimony from Goldman Sachs executives regarding their disclosure to investors. The Treasury market caught a sizeable flight-to-quality bid the day before the FOMC meeting. This was not driven by direct economic concerns or FOMC expectations. Instead, the key drivers were Greece’s long- and short-term credit ratings, which were cut to junk status, and bonds issued by the Republic of Portugal, whose credit ratings were lowered to A-/A2. The move within the Treasury market was sharp and fast. The curve flattened, with the five- and seven-year yields leading the way, moving approximately 15 basis points lower. There was no follow-through as a new trading day began prior to the release of the statement. The entire Treasury curve retraced approximately half of the strong move from the prior day. This reversal continued after the release of the FOMC rate decision and statement. The 10-year yield continued its move higher, touching 3.77% after the release.

Looking forward, Treasuries will continue to ebb and flow from data point to data point. Although they remain range-bound, we continue to have an upward bias regarding yields. We expect the trend of higher rates to continue to emerge as we move through the different stages of the economic recovery. We maintain the view that the economy is stabilizing, although questions remain about the timing, sustainability and strength of growth.

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