Salient to Investors:
Jim O’Neill writes:
- When the Fed starts to taper, expect turbulence in financial markets, especially for overpriced assets. We are headed to a normal 10-yr T-yield of 4 percent or more versus 2.2 percent now, and to a return of the equity culture.
- In 1994, Greenspan made it clear that the Fed was about to start raising rates, panicking those in Australian, European and other developed-market bonds who had invested for the yield spread over US Treasuries.
- It seems inevitable that a shock like 1994 will happen again because the search for yield has gone wider and deeper, and the deviation from normal valuations has been amplified by the shift of pension funds and insurance companies out of equities into fashionable bonds.
- The past few weeks disproves the belief that policy makers have learned from past mistakes and that the fallout from tapering will be nothing to worry about.
- When the tapering comes, high-yield complex muni bonds and emerging-market bonds will suffer more than US Treasuries, along with gold, while unloved peripheral European bonds and reasonably valued equity markets will be a better thing to own.
- Bernanke is far more preoccupied with guiding investors’ expectations than Greenspan ever was. It makes little difference that Bernanke prefers transparency while Greenspan liked opacity, because transparency does not mean clarity. The Fed can talk about tapering all it likes, but it can’t change the basic laws of economics and valuation.
- In the short-term, getting back to normal means a fallout in equities but unlikely to be lasting as longer-term investors will want more exposure to equities, not less – as people fall out of love with bonds, they’ll fall back in love with equities.
Read the full article at http://www.bloomberg.com/news/2013-06-11/can-bernanke-avoid-a-meltdown-in-the-bond-market-.html
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