As Iain Stealey, head of global aggregate portfolio management at JP Morgan said, the announcement contained no real surprises and the market was encouraged by both the implication that the Fed felt the US economy was strong enough to move rates off the zero bound and also that any increases will be gradual.
That said, he added, JP Morgan is of the view that interest rates and, thus bond markets will be characterised by the three S’s: slow, sluggish and shallow.
As a result, he added, the firm is neutrally positioned, as there is no real need for long-dated yields to rise much from here.
Russell Silberston, Investec Asset Management’s head of rates, agrees that longer dated yields are unlikely to move rapidly from here.
“The lodestar for fixed income for us is the 5-yr/5-yr forward rate, which we view as a good medium term proxy for where the market expects rates to be. This has been oscillating around the 2.575% to 3% mark. And, with 30-year Treasuries opening at 3%, I would argue that a lot of the move is already priced into the market.”
As a result of this, he said, Investec has been exploring the optionality around those scenarios outside of the central case put forward by the Fed and hoped for by the market – that the US economy is indeed strong enough to withstand a gradual normalisation of policy.
There is, of course the possibility that the Fed has got it wrong, that either it has gone too soon or that it has actually waited too long.
“Neither of these scenarios are really being priced into markets and so there are some very interesting trades available there,” Silberston explained, although he added that the firm is largely positioned for the central case. But, he said like the Fed it remains very focused on exactly what the data indicates.
