Interest Rates Headed Lower Even As Fed Ends Quantitative Easing

This coming change has helped roil global equity markets and coincided with the most recent leg in the year-long rally in US Treasuries. The US 10-year note closed Friday at 2.32 percent, its lowest close on a yield basis this year.

Prices and yields move inversely, hence the low yield has pushed the price of the bonds, and corresponding U.S. Treasury ETFs, to their year-to-date highs. The rally in the bond market is poised to continue this week.

Related Link: Jobs Data Highlights The Fed's Sweet Spot

Accommodating Central Banks

The four major central banks used the International Monetary Fund (IMF) annual meeting this week to assure investors that monetary policy in the major economies would remain accommodative.

The European Central Bank (ECB) and the Bank of Japan (BOJ) will continue their own quantitative easing programs. Meanwhile the Fed and the Bank of England are prepared to hold back on their plans to raise rates in 2015.

Since last month's Fed meeting, interest rate futures markets have pushed the timeline further out for when the Fed will finally start to raise rates. Markets now anticipate the Fed will forestall moving rates higher until September 2015. Previously, the markets were signaling the first rate rise in July.

Weakness in foreign markets and the prospects of declining inflation rates in Europe and Asia are the catalysts for this change in policy.

Weak Global Growth Worries

“If foreign growth is weaker than anticipated, the consequences for the US economy could lead the Fed to remove accommodation more slowly than otherwise.” stated Fed Vice Chairman Stanley Fischer in a speech at the IMF meeting in Washington. Fed Chair Janet Yellen is scheduled to speak Friday at a Federal Reserve Bank of Boston economic conference.

The dovish commentary came against a backdrop of increasing concerns over global economic growth and falling prices. Last week the IMF downgraded its forecast on global growth this year to 3.3 percent from the 3.4 percent it previously expected. The same report raised the specter of a eurozone recession and the possibility of disinflation or deflation in Europe.

Disinflation represents weak price growth, while deflation is a condition of falling prices for goods and services.

Monetary policy in the eurozone has so far has not been sufficient to stop the region from slipping closer to a new recession. Last week, ECB president Mario Draghi said that governments must act “urgently” to enact fiscal reforms, adding: “I am uncertain there will be very good times ahead if we do not reform now.”

The gloomy assessments by the world's central bankers helped push the S&P 500 down 3.1 percent for the week, its worst weekly performance since May 2012. In addition, global oil prices have been falling on fears of oversupply amid slowing consumption in Asia and Europe.

On Thursday benchmark crude oil futures hit multi-year lows in both the London and New York oil futures markets. For the week, NYMEX light sweet crude for November delivery was off 4.4 percent. This is the largest weekly percentage drop since the week ending January 3.