Bond Yield going SREITs going
.Position for a short-term rebound in S-REITs as bond yield looks poised for a pullback
.S-REITs picks – AREIT, Suntec REIT, MCT & CDL HT
Start of QE tapering fully anticipated – Fed Chairman Ben Bernanke gave financial markets nearly four months to prepare for QE tapering, which feels like a “millennium” in high-speed financial markets. US 10-year bond yield, for example, has risen from 1.63% at the beginning of May to touch the critical 3% level last week. Equities have also reacted with S-REITs bearing the brunt of the selling in recent months. The FTSE ST REIT underperformed, falling 20% from May’s high.
The start and end dates, as well as the pace of QE tapering are among the most widely discussed and debated issues in recent times. Consensus expects the process to: (1) start as soon as next week’s FOMC meeting with a US$10bn cut to US$75bn; and, (2) end by mid-2014.
US 10-year bond yield poised for a pullback – Using Elliot wave pattern observation and projection, our technical view for the US 10-year bond yield is that the rise which started from 1.63% (beginning in the month of May) is about to complete (or already completed) a 5-wave up sequence. A downward retracement follows this completion that can see yield level pull back to 2.68% (23.6% downward retracement) or even 2.48% (38.2% downward retracement) in the coming weeks/months ahead before turning up again.
This technical view blends with our economist’s skepticism that the Fed has the stamina and right ammunition to progressively reduce QE such that all US$85bn/mth purchase will be entirely removed by the middle of next year. He notes that structural employment growth in the US heath care sector as well as part-time and restaurant workers are greatly overstating the recent improvement in non-farm payrolls. Furthermore, the recent increase in interest rates has negatively affected US mortgage applications and new home sales.
US 10-year yield could pull back off the c.3% mark if: (1) QE tapering is delayed till after September; or, (2) the initial tapering amount is less than US$10bn; or, (3) the Fed’s forward statement is dovish. Three ‘ifs’ but given that financial markets have had four months to react, it’s not hard to imagine that investors can swing somewhat in the other direction should any of the ‘ifs’ materializes.
Publish date: 12/09/13