Fed move reinforces bond market gloom

Despite seven years on the zero bound, bond market reaction to the Fed’s first rate hike in nine years was pretty muted, which is what the FOMC would have been going for.

Fed move reinforces bond market gloom

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TwentyFour Asset Management’s Chris Bowie agrees that the economic data coming out of the US will be even more in focus now.

“Ultimately any future inflation insurance should be well received by the long end of the yield curve, but for now we want to see what happens to core CPI over the next few months.

We are far from inflation bears, but wonder if base effects alone could lift core CPIs back towards 2% more quickly than the markets are currently pricing in – and that would not be so good for inflation expectations nor for the term premium,” he said.

Outlook

For AXA Investment Management’s Chris Iggo, the outlook from here for bond markets is not particularly attractive as, he pointed out, the world finds itself at the bottom of a long drawn-out interest rate cycle and when credit fundamentals are unlikely to get any better”.

Indeed he added: “For investment grade, especially in Europe, an all in yield of 1.5% doesn’t provide much income to protect investors from either a widening of credit spreads or a deterioration in the macro outlook or a rise in interest rate expectations under a scenario of stronger, QE-inspired, growth.”

While he says that the yield advantage in the US and UK investment grade markets provides a little more optimism, the key feature of most credit sectors is the dispersion of yield that has resulted from a recognition of significant credit and liquidity risks present within certain areas of the market – particularly the energy sub-index of the US high yield market.

Stealey is a little more bullish saying that the firm currently likes the high yield market ex-energy , as it does not believe it is quite as close to the end of the business cycle as some do. However, he added that it has lightened its exposure to emerging markets, as it expects growth to remain stronger in the developed world.

Janus Capital is also fairly gloomy on its outlook for the fixed income markets as it expects weak commodity prices, decelerating emerging market growth, demographic trends and a strong U.S. dollar to keep long-term rates relatively contained.

“We remain concerned about divergent monetary policies among advanced economies, stretched valuations across many fixed income sectors, nearing the end of the credit cycle, and low levels of market liquidity.

“Security avoidance will continue to be a key driver in delivering risk-adjusted returns and capital preservation for clients. Importantly, we believe our defensive stance positions us to act as a provider of liquidity so that we can opportunistically step into dislocations and purchase attractively priced securities.”

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