Investors relieved after Bernanke: Bank bonds weaken

August 25, 2011 07:00 PM

Equity investors finally warmed to the words of Fed Chairman Bernanke at the central bank symposium after initially selling off as he said the Fed couldn’t bear all of the strain of a weakened economy. However, he did say that the core fundamentals remained intact and predicted a slow recovery that would eventually see healthier growth rates prevail. In the meantime Washington should work out a fiscal response to spur consumption and figure out how to permanently change the way it operates so as to avoid a repeat of the economic shockwaves it caused over the summer. While equity volumes were reportedly light, corporate bond traders were left holding the bag as investors stepped up sell orders on financials and increasingly so on European banking names. While Bernanke’s longer-range forecast for recovery is the story of the day, there’s no mistaking that little has changed in terms of the potential risks facing investors.

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Bonds issued by JPMorgan Chase & Co. (JPM), Citigroup Inc., Morgan Stanley (MS) and American Express were among the most actively traded after Bernanke’s speech with spreads to treasuries widening in each case. The American financial sector remains a bleak spot and as Bernanke emphasized the recession left the debt-strapped consumer in need of more than simply lower interest rates. The housing market continues to act as a deadweight while high unemployment sours existing loans on bankers’ balance sheets, depressing demand for new borrowing. Investors continue to offload bank bonds in this climate and keep looking elsewhere.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC

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About the Author

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.