Feb head, Yellen comment catches market by surprise

US Fed Head, Yellen

It's back to concentrating on more prosaic matters as investors digest The United States Federal Reserve head Janet Yellen's comments late Wednesday.
As expected, the US Federal Reserve cut its bond buying programme by$10bn a month to $55bn (originally it was $85bn). But it was Yellen apparently hawkish views on the Fed funds rate that got investors in a funk.
She now sees the rate being 1 percent by the end of 2015, 25 basis points more than previously suggested, and 2.25 percent a year later, 50 basis points higher than expectations.
Unsurprisingly that led to the usual knee-jerk sell off of various assets. Ten-year Treasury yields spun up to 2.75 percent from 2.68 percent, while equity markets in the US and later in Asia traded down.
Meanwhile, credit markets are opening roll day for the European indices wider. As of 0755 GMT according to Tradeweb, the new Main series 20 index is one basis point wider at 72 basis points, with the S21/S20 roll at 9.5 basis points. The Crossover S20 is two basis points wider at 256 basis points with the roll worth 70 basis points and the Senior Financials S20 is 1.5 basis points wider at 89 basis points, with the roll worth 11 basis points.
Quite why the market is getting itself tied up in knots over this statement is strange. Surely no one thinks the Fed funds rate will stay close to zero forever? And even if it begins to get hiked earlier than expected, at 1 percent or even 2.25 percent it will hardly be at punitive levels. In 2007, the Fed funds rate was above 5 percent. In 2001 it was above 6 percent.
The big question now, though, is whether markets will continue to lose all sense of perspective and Yellen's statement leads to a major and sustained correction, similar to the one we saw at the end of January.
Elsewhere, an official within Ukraine's finance ministry, said the sovereign will continue to honour its debts, including the bond sold to Russia at the end of last year,
Analysts expect the acting government to reach an agreement with the IMF soon, possibly by Friday. The assumption is too that there will be no PSI, though clearly the situation is fluid.