By Karen Pierog and Saqib Iqbal Ahmed
Nov 2 (Reuters) – As the US Federal Reserve prepares to cut back on its massive asset purchases, investors in the bond market are scrutinizing the way ahead, looking for signs of how effectively the The central bank may tighten its monetary policy to cope with persistent inflation.
At their meeting this week, policymakers are expected to give the green light to curtail purchases of central bank bonds, which have led to the acquisition of $ 120 billion a month of government-backed debt, in an attempt to stabilize the economy after the hit of the pandemic.
The move, which is expected to start in mid-November or mid-December, has been widely announced. Even so, the Treasury market has been agitated in the last week, as investors have taken positions that assume a more restrictive monetary policy.
Investors have sharply raised expectations that inflation will force the Fed to raise interest rates earlier and faster than anticipated. Short-term rates have risen and the yield curve has flattened.
“With the taper out of the way, the next big thing is when the Federal Reserve prepares to tighten its monetary policy, giving more weight to all the important economic data that is released,” said Chuck Tomes, manager portfolio partner of Manulife Asset Management. “There could be more volatility around all the important economic data.”
Swings in the bond market have likely already caused some leveraged hedge funds to suffer losses, Bank of America warned in a report. The moves could also reflect that investors are undoing positions to avoid further losses, Deutsche Bank said.
Wall Street banks, for their part, are intensifying preparations for tapering to ensure they are able to handle spikes in market volatility.
There may still be surprises. If the downsizing does not occur at this time, the yield curve on U.S. Treasuries could rise sharply, while a faster-than-expected drawdown program would lead to substantial flattening, according to Steve Bartolini, portfolio manager. for the basic bond strategy at T. Rowe Price.
The Fed’s communication this time contrasts with that of 2013, when bond yields rose sharply during the so-called “taper tantrum” after then-Fed chief Ben Bernanke unexpectedly told lawmakers that the central bank it could slow the pace of asset purchases that had been propping up the markets. 10-year US Treasury yields went from around 2% in May 2013 to around 3% in December.
While the move isn’t that extreme so far, the U.S. bond market is heading for its first annual loss since 2013.
CONCERN ABOUT PRICES
Investors are keeping an eye on accelerating inflation and are looking to the Fed meeting to see if Chairman Jerome Powell’s stance that the rise in prices will moderate over time may be faltering.
“It’s the labor force, it’s inflation, it’s the consumer that we’re most concerned about,” said Tom Martin, senior portfolio manager at Globalt Investments, who believes long-term bond yields may fall once it is announced. the taper, as rising short-term borrowing costs act as a barrier to growth.
“We are concerned that the central bank could make a monetary policy mistake and raise rates earlier than it should,” said Martin, who said that it has been “positioned so that interest rates do not rise for a while and we maintain those positions. “.
Stephen Tally, COO of Leo Wealth, said the risk was that “inflation is not as transitory as we have been led to believe” and that “it will push the Fed further and faster than it wants.”
Inflation expectations soared last week, with the 5-year and 10-year rates reaching their highest levels in more than a decade.
“What’s going to be more dangerous is how (Powell) dances to the word transitory and puts a definition around that maybe in terms of a time frame,” said Lon Erickson, a portfolio manager at Thornburg Investment Management.
Sit Investment Associates portfolio manager Bryce Doty said he has been tightening portfolios recently with an eye toward accelerating inflation.
“I think you have to keep investing a lot in TIPS and anything that offers some protection against inflation,” Doty said.
Powell, whose uncertain renewal as Fed chairman has also influenced market movements, places rate hikes on a separate plane from tapering, with higher interest rates dependent on a return to full employment and on for inflation to reach the Fed’s 2% target, albeit moderately above that level for some time.
Investors have been keeping a close eye on the monthly employment reports and the October one will be released on Friday.
“After a rather weak number in September, are you relying on that October number before you start to delve into discussions about rate hikes?” Asked Jason England, Janus Henderson’s Global Bond Portfolio Manager. Investors.
(Report by Karen Pierog and Saqib Iqbal Ahmed; Edited in Spanish by Javier López de Lérida)
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