Investors Remain in Buying Mood Even Before Anticipated Reduction of Bond-Buying Program

 MARKETS  Updated September 18, 2013, 12:15 a.m. ET Markets Calm Before Fed Decision Investors Remain in Buying Mood Even Before Anticipated Reduction of Bond-Buying Program

 MIKE CHERNEY

 CAROLYN CUI

 MIN ZENG  CONNECT

What will the Fed do at its meeting this week? WSJ's Jon Hilsenrath says it's a close call: markets expect the Fed to pull back slightly on quantitative easing. But continued worries about the economy may lead the Fed to hold off. If investors are concerned about the imminent end to the Federal Reserve's monetary stimulus, the markets haven't noticed.

Despite widespread expectations that the Fed will announce a trimming of a bond-buying program aimed at pushing down interest rates and propping up the economic recovery, fund managers have been in a buying mood lately.

The blue-chip Dow Jones Industrial Average on Tuesday advanced for the 11th time in 14 trading sessions, and U.S. Treasury prices rose for the fifth straight day.

Markets: Ahead of the Fed

 Pullback on Bond Buys Undermines Commodities  Investors Sell Dollar Ahead of Fed Taper Decision  Treasury Prices Rise Ahead of Expected Fed Taper  Stocks Are Seen Braced for a Fed 'Taper'—But Vulnerable to Surprises

Many investors expect the Fed to decide to cut its $85 billion monthly purchases of bonds by about $10 billion to $15 billion. Markets were roiled in May and June after Fed chief Ben Bernanke said the U.S. central bank would consider reducing purchases in a process dubbed "tapering."

Some investors dismiss the prospect of much turbulence this time. They say players in stock, bond and commodity markets have had time to prepare for potential Fed action, assuming the Fed acts largely within market expectations, and that a selloff in bonds since Mr. Bernanke's comments means there is less potential for a large price decline now.

The Dow Jones Industrial Average has advanced 4.9% this month to within 1% of a record, while the yield on the benchmark 10-year Treasury note has held steady around 2.85%. The Chicago Board Options Exchange's Volatility Index, a measure of how much investors expect to see the S&P 500-stock index swing over the coming month, was at 14.53 on Tuesday, in line with its 2013 average and below its long-term average near 20.

"They've been talking about tapering going back several months now," said Alex Roever, head of U.S. interest rate strategy for J.P. Morgan Securities. "So we sort of think the whole idea of tapering is priced into the market." Bloomberg News

A worker handles money being printed at the Bureau of Engraving and Printing in Washington.

Bond investors have been buying Treasury debt, reversing recent months of selling. Net speculative short positions in U.S. Treasury futures rose to 688,000 contracts as of Sept. 10, the most bearish position since 2005, according to data compiled by RBC Capital Markets. Short sellers have been buying bonds to close out these bets over the past several days, especially after former Treasury Secretary Lawrence Summers pulled out of the contest for the Fed chairmanship.

The market has priced in "too hawkish a Fed profile," said Robert Tipp, chief investment strategist at Prudential Fixed Income, which had $391 billion of assets under management as of June. Mr. Tipp said he has been buying long-term bonds.

Ahead of Wednesday's Fed news, strategists predict how stocks could react, covering specific scenarios. Plus Adobe, FedEx and General Mills will be moving on their earnings reports.

 Real Time Economics: It's Not Just Whether to Taper, But How  MoneyBeat: Why Taper? Inflation Is Benign  MoneyBeat: Looming Taper Shrugged Off  Fed Faces Tough Sell on Low-Rate Strategy Scott Carmack, co-portfolio manager at Leader Capital, which oversees about $700 million in fixed-income assets, said bond markets could rally Wednesday should the Fed taper within market expectations.

To be sure, large market swings are possible, particularly as traders digest the news following its release. Outsize moves are more likely if the Fed decides to reduce its monthly purchases by more than $10 billion to $15 billion, investors said.

Many investors also say stocks and bonds could be in for a selloff should the Fed signal it has decided to set a steady course in winding down its so-called quantitative easing efforts. The extent of any decline, they say, would ultimately depend on the degree to which the economy shows it is healthy enough to stand on its own.

Associated Press

A trader works on the floor of the New York Stock Exchange this week.

Much of the concern stems from stock selloffs that grew out of previous Fed efforts to pull back on stimulus. Stock prices tumbled by percentages in the double digits after the first two rounds of Fed stimulus ended in 2010 and 2011.

In the most recent episode, the yield on 10-year U.S. Treasury notes brushed over 3% earlier this month—the first time it crossed that mark in more than two years—from 1.6% in May. When interest rates go up, bond prices go down.

But many investors now say bonds look like a buy. Ray Remy, head of fixed income trading in New York at Daiwa Capital Markets America Inc., is buying Treasurys. He said he expects the 10-year yield to drop to 2.75%. "I am a buyer here and I think the rise in yields in the past few months is overdone,'' said Mr. Remy.

In other markets, many investors are saying the tepid global economic picture is likely to reduce players' interest in the details of the Fed move.

Sean Corrigan, chief investment strategist at Switzerland-based Diapason Commodities Management, which has $6.5 billion under management, said oil prices have been mostly driven by tension in the Middle East and production shortages from Libya. Nymex crude oil futures, off 1.1% Tuesday to $105.42, are up 14.8% this year.

The price of gold has tumbled 21.8% this year amid signs of slowing stimulus from central banks. Copper, widely viewed as a key read on global economic activity, is down 11.3%.

Several high-grade companies sold bonds this week, taking advantage of the relative market calm ahead of the Fed announcement. One measure from Citigroup shows bond- market volatility largely unchanged since early August, after a roughly 45% rise in the spring.

On Monday, ING Bank NV sold $2 billion in corporate bonds and consumer goods company Reckitt Benckiser Group PLC sold $1 billion through a subsidiary. Last week, Verizon Communications Inc. sold $49 billion, the biggest corporate bond offering ever.

—Chris Dieterich contributed to this article.

Write to Mike Cherney at [email protected], Carolyn Cui at [email protected] and Min Zeng at [email protected]

A version of this article appeared September 17, 2013, on page C4 in the U.S. edition of The Wall Street Journal, with the headline: Markets Calm Before Fed Decision.

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