"No man can become rich without himself enriching others"
Andrew Carnegie

Monday, March 25, 2013

Bond Fund Could be Signaling End to Fed’s Easy Money Policy

Its move up could be foretelling a rise in interest rates before the end of this year

Friday’s bounce of 91 Dow points also erased the 90-point loss on Thursday, which was the biggest one-day loss since late February. The focus of buying was aimed at the consumer sector following better-than-expected earnings from Nike (NYSE:NKE ) and Tiffany & Co. (NYSE:TIF). But the financial sector failed to participate in sympathy with Europe’s troubles in Cyprus.
At the close, the Dow Jones Industrial Aerage was up 91 points to 14,512, the S&P 500 gained 11 points at 1,557, and the Nasdaq gained 22 points at 3,245. The NYSE traded 620 million shares and the Nasdaq crossed 372 million. Advancers led decliners on the Big Board by 1.8-to-1 and on the Nasdaq by 1.4-to-1. For the week, the Dow was flat, the S&P 500 was down 0.2%, and the Nasdaq was down 0.1%.

Trade of the Day Chart Key
Last week, the Dow Jones Utility Average made a new bull market high taking out both the closing high of July 30 (496.56) and intraday high of Aug. 1 (498.84). This confirmed the breakout at 488 and gives further credence to the Dow Theory buy signal flashed earlier by the industrials.

The Black Rock Floating Rate Income Strategies Fund (NYSE:FRA) is a floating rate, closed-end fund designed to provide a protective hedge for bond holders from a rise in interest rates. At some point, the Fed will have to allow interest rates to rise as they back off of their monthly bond purchases. The fund has been in an uptrend ever since breaking higher in late December. In addition to offsetting a future decline in bond prices, it pays a hefty 5.5% dividend yield.
Conclusion: The Fed reiterated its policy of low interest rates this week, indicating that until the unemployment rate got to “around 6.5%,” it would continue with its policy of easing.
But many analysts are predicting that the Fed’s low-rate policy could change before the end of this year, and the Black Rock Floating Rate Fund chart tends to confirm this view — rising in anticipation of the change.
But we are getting an opposite view from the Dow Jones Utility Average. Usually, as interest rates rise, the relatively high dividend rate on utilities makes them less attractive and the stocks fall as money flows back into bonds.
“Is a puzzlement,” said the monarch in The King and I. Someone will be proven incorrect, but the question is who, and when? ...
Enhanced by Zemanta