All-time highs and preemptive runs

June 23, 2014 08:09 AM
What does proposed bond exit fee indicate?

Last Thursday, we saw gold futures rally 3.24% ($41.30) to break out above the psychological $1,300 level closing at $1,313.70. Many pundits and talking heads on financial networks attributed this rally to macro unrest and the apparently worsening Iraq situation. While that is a plausible notion, we did not see a commensurate rally in energies, specifically Brent crude. It is hard to square the two. If this flight to safety in gold was a result of unrest in one of the richest oil nations in the Middle East, then why was there no such movement in the most sought after energy source on earth?

Without rehashing global central bank policies over the better part of the last decade, we do know that there is more cash sloshing around the world than at any previous point in history with precious little to show for it. Economics 101 teaches us that if supply is increased without any meaningful support from the demand side, prices should fall. Thus far, we have not seen any significant manifestations of inflation despite the best efforts of central bank printing until, perhaps, now. 

While any potentially bullish economic data is trotted out as evidence of the ‘recovery’ and myriad excuses are made for any below-expectation prints, the sub 2.6% yield on U.S. 10-year Treasury notes belies any notion of economic strength. Many attribute these low yields to extreme bond buying by central banks, and there is truth to that. However, in the event of a truly strengthening economy (and with volatility at such depressed levels) one would expect a rotation into a more risk-on environment. With major indexes at or near all-time highs, that has yet to come to fruition.

In the June 16 issue of the Financial Times (FT), the Federal Reserve put up a trial balloon by floating the notion of imposing exit fees on bond funds. As evidenced by the 2008 crash, when equity markets broke down, there has historically been a related influx into bond funds. So, if the Fed is worried about potential weakness in the equity markets, then why propose exit fees on bond funds? 

A New York Federal Reserve white paper from April of 2014 explores the idea of imposing withdrawal fees on money market funds. The publication concludes that there is a real possibility that suspending convertibility, including the imposition of gates and/or fees for redemptions, can create runs that would not otherwise occur.

Given that it was the Fed who produced this analysis, it is not clear what the ultimate motivation behind hinting at potential exit fees for bond funds truly is. On June 17, the day after the FT article was published, 10-year Treasury futures sold off significantly to close at 123’27.5 (-’14.5 on the day). This break in Treasuries appeared anomalous considering the unrest in the Middle East and the Ukraine but the losses were made up – and then some – by Thursday’s close.

The story of the long awaited economic recovery might carry more weight if we were able to get 10-year yields back to what are considered more normal rates but it appears that, as of yet, the markets have not been fooled.  Given that, is it possible that the Fed is actually trying to induce a preemptive run on fixed income debt?

 Should you wish to discuss any of the ideas discussed in this article, contact JW Reynoso directly at


About the Author

JW Reynoso, Investment Advisor at RCM Asset Management, began his career on the floor of the Chicago Board Options Exchange before working as an options broker at the Chicago Mercantile Exchange. JW provides RCM Asset Management clients with risk management and trading strategies that focus on Managed Futures and options. JW can be reached at