Federal Reserve To End QE In October; Goldman Says Dynamics Supporting Bond Rally To Unwind

In the weekly Global Economics note Goldman Sachs GS issued Wednesday, the bank stated it expects the Fed will raise rates in H1 2015 thanks to "stronger US growth."

The returns bond holders have seen in the seven and 10 year maturities has outstripped that of stocks in all major advanced economies. That performance is set to unwind as "the dynamics that have supported the bond rally" weaken.

Expectations of the Fed's rate hike has begun to manifest within the longer-dated bonds, specifically the 30-year maturity (light blue line below).

The FOMC said QE will culminate with a fifteen billion dollar reduction in October if the current outlook holds.  

Aside from believing investors were "too complacent on risks" the FED said it saw broadly balanced jobs, growth, and inflation risks.  

A look at the word bubble of the FED minutes shows that inflation is the central banks' largest talking point:

Going forward, to monitor inflation participants should be monitoring the global bond premiums as those track six to 10 years ahead CPI inflation expectations well.

Market participants have questioned the resiliency of this market rally once the Fed removes itself from monthly purchases and begins to raise rates.  

Throughout the year Goldman has changed its view on economic expansion while maintaining the view that there is little steam left in the equity market rally.

Volatility could pick up as institutions begin to reposition after Q2 earnings, which will hit full swing two weeks from now.