Salient to Investors:
Bond investors are gaining confidence that Bernanke will unwind the Fed’s $3.3 trillion balance sheet without sparking a crash similar to 1994. Money managers from JP Morgan to Fidelity say this time will be different, in part because of Bernanke’s transparency.
Edward Fitzpatrick at JPMorgan said the Fed’s transparency should help offset the risks that were experienced in 1994.
Lloyd C. Blankfein at Goldman Sachs worries about the ‘94 losses and says investors are complacent due to record low rates for more than four years.
Antulio Bomfim at Macroeconomic Advisers said rates could rise rapidly for at least two different reasons: either the Fed bungles its communication and spooks the market, or the economic data could become a lot stronger than expected.
Rick Rieder at BlackRock expects a spring-loaded effect, where once the Fed starts pulling back, maybe you get a little bit of inflation, 30-year yields will say move up 50 to 75 basis points. BlackRock is reducing longer-term Treasuries. $10 million in 30-yr bonds at 2.83 percent would lose $1.2 million if the yield rose 75 basis points to 3.58 percent by the end of by the end of 2013, lose $874,000 if bt the end of 2014.
Michael Materasso at Franklin Templeton Investments said this Fed is very different in terms of transparency and communication from the 1994 Fed, and when it begins raising rates, short-term bonds and floating-rate notes, whose yields reset periodically, will be attractive.
Gemma Wright-Casparius at Vanguard Inflation-Protected Securities Fund said part of the 1994 bond market sell-off was really a policy error – with bond yields at historic lows for corporates and Treasuries, investors can expect poor returns of about 1 to 2 percent.
Michael Gapen at Barclays said concerns about future inflation propelled increases in long-term T-yields when the Fed raised rates in past cycles.
Bank of America sees a lesser threat today because inflation in more than half of the world economy, including the US and the euro area, is below the central banks’ desired levels as growth slows and commodity prices slide.
William Irving at Fidelity Investments said the market is so concerned and focused about this risk that this reduces the likelihood of it happening.
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