Now that Yellen's much-anticipated speech has concluded, markets are focusing on Friday's Bureau of Labor Statistics (BLS) monthly Non-Farm Payrolls (NFP) report. Again, we do not recommend placing too much emphasis on any anticipated event (much less one that is revised multiple times and is shown to be less accurate than other lesser-known reports such as today's ADP employment report).
However, lets examine what has transpired since our last post on Thursday. The benchmark 10-year treasury immediately dropped and then bounced (all within minutes of the publication of the transcript of Yellen's speech), before her right-hand man, Stanley Fischer, clarified Yellen's comments in a CNBC interview and sent the 10-year treasury bond tumbling. On Monday, Tuesday, and today, the benchmark bond has traded roughly where it was pre-speech. Of course, had Friday been the start of a huge move, commentators would have said that Yellen drove the huge decline or rally.
Could treasuries rise steeply? Yes. Could they drop precipitously? Yes. Do we know which direction they will go? No. And this is just looking at the 10-year treasury where you only need to get the direction, timing, and speed of one number right. Even a simple corporate bond is much more difficult, as you must get the direction, timing, and degree of spread movements correct. It is unlikely that anyone can predict all three variables (much less six!), so you can forget about predictions of more complex instruments. As you can tell, we put very little faith in predictions. Instead, we advocate looking at the future as a range of possibilities. Build portfolios to succeed in variety of possible futures. Stress test portfolios through falling rates, rising rates, stagnant rates, all different inflationary scenarios and so on. We would not advise putting all of your chips on a single prediction and especially not on a consistent basis.
"There are old traders and there are bold traders, but there are very few old, bold traders." -Ed Seykota