Tapering leads to fears over treasuries

Federal Reserve buildingAsset managers have become even more cautious about treasuries and other interest rate-sensitive sectors in the US since the Federal Reserve said it would taper its bond purchases.

Trevor Greetham, director of asset allocation at Fidelity Worldwide Investment, says his team has turned cautious on government bonds and sectors such as property, utilities and consumer staples.

However, he says a disinflationary pick up in global growth is positive for stocks and his team has built overweight positions in the US in its multi-asset funds.

The Fed says it will start tapering its $85-billion-a-month (€62 billion) bond-buying programme by $10 billion in January, amid signs of recovery in the world’s largest economy.

In a statement, the Fed says economic activity is expanding at a moderate pace, labour market conditions have improved, the unemployment rate has declined, and household spending and business fixed investment are up, even though the recovery in the housing sector has slowed.

Rick Rieder, chief investment officer of fundamental fixed income at BlackRock, says the last round of quantitative easing was “too large” and disrupted the proper functioning of financial markets without meaningfully helping the labour market.

“This won’t be a big shock for bonds, because there’s still plenty of easy money in the global financial system,” he says.

“We are looking for the 10-year US treasury to inch up to 3.25% or so by the middle of next year.”

Spread sectors – high yield, commercial mortgages and other asset-backed bonds as well as longer-dated municipal bonds – are all still better bets than treasuries, says Rieder.

Teis Knuthsen, chief investment officer at Saxo Private Bank, recommends maintaining an overweight position in equities relative to bonds, and continuing to underweight emerging markets versus developed markets. He is bearish on gold.

“Higher growth, low inflation and credible central banks is the last that gold needs, and I maintain my view that gold prices will continue to fall,” Knuthsen says.

US stocks surged since the announcement, according to data from Clear Currency, but 10-year treasury yields rose just six basis points.

This is exactly the opposite of what happened in June when global equity markets lost $3 trillion in the five days after Fed chairman Ben Bernanke said he might start tapering this year and end the bond-buying programme by mid-2014.

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