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Jupiter's Bezalel: the most compelling bond opportunities
by Ariel Bezalel on Jan 02, 2014 at 14:32
In 2014, global bond markets will pay close attention to the actions of the US Federal Reserve (Fed), which has started to wean the US (and global) economy off its $85 billion per month quantitative easing programme.
The news that the Fed would initially taper its programme by $10 billion per month was greeted well by bond and equity markets.
The lower-for-longer tone to the Fed’s projections for interest rates was also positive and underscored the fact that the Fed believes the economic recovery still has some way to go. The cautious tone also affirmed the central bank’s desire not to relinquish control of interest rates and cause undue weakness in the economy and markets.
Reasons for optimism and possible cause for concern
We remain optimistic about the outlook for credit markets in 2014. Our optimistic case is that economic data broadly meets expectations and the market factors in an orderly process.
Under this scenario, we believe there is potential for high yield bonds to produce decent returns.
However, we remain mindful that the Fed faces a formidable task. There is a risk that economic data will come in a lot stronger than expected. This may lead to a market panic over the pace of rate rises and potentially bring forward expectations for a rate increase to later in the year, igniting a 1994-style market reversal.
This seems unlikely for now, as low US inflation is currently giving the central bank cause for concern and a justification for maintaining a gradual approach to tapering.
In his speech, Ben Bernanke even highlighted that the Fed may consider further action if inflation did not move up towards its 2% target.
However, should growth start to accelerate, US inflation data will receive close scrutiny and is likely to be a particularly important indicator for shaping bond market sentiment in the coming year.
Closer to home, the Bank of England recently responded to a pickup in UK economic growth by bringing forward expectations for when unemployment would fall to its 7% target to December 2014, some 18 months earlier than previously indicated.
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