Conspiracy Theory

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What's going on?

The US Federal Reserve (the Fed) announced this week that it’d be selling $14 billion worth of corporate bonds, and suspicious investors might be reading too much into it…

What does this mean?

When the pandemic kicked off last year, the Fed bought up a host of corporate bonds to help companies stay on two feet as things descended into chaos. But now that things have settled down, it’s decided to sell some of them off. It’s worth pointing out, of course, that the Fed’s still buying around $120 billion worth of assets every month, so this sell-off is just a drop in the ocean. But for investors, it’s another in a long line of hints that interest rates are set to rise sooner rather than later.

Why should I care?

For markets: The interest rate fear is real. 

Investors were expecting the Fed to hold onto these bonds until they were fully paid off, so the central bank’s decision will increase the overall supply. All else equal, that’ll send prices down and yields – which move in the opposite direction – up. And since investors use existing yields to inform interest rates on new bonds, the move will effectively increase rates in the market – which isn’t great news for companies’ earnings and, by extension, their share prices.

The bigger picture: Your guess is as good as theirs.

Investors might’ve seen something like this coming: US inflation is at record highs, so this could be a stopgap before eventually raising interest rates directly. But it remains to be seen whether the sell-off will actually slow down rising prices. That’s especially true given fresh data out on Thursday that showed the private sector added more jobs than expected last month, which could lead to more consumer spending and higher economic growth. Then again, there’s hope yet: data out on Friday is expected to show that wage growth isn’t recovering even if job growth is.

Originally posted as part of the Finimize daily email.

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