Fixed-income portfolio managers are coming to grips with the fact that they’ve been dead wrong about interest rates.
Predictions for higher rates and inflation have been an embarrassment for many of the investment professionals who made them.
Today, “very few people [take] ownership” of those faulty predictions, said Marc Seidner, head of fixed income at GMO.
Seidner, moderator at the CFA Institute’s Fixed-Income Management conference going on today and Friday in Huntington Beach, Calif., said bond managers seem to have experienced a complete flip-flop in their views.
“The inflation story has changed quite a bit” from last year’s conference he said, when the majority of participants were worried about inflation, to the “the point where they now see deflation as the predominant risk.”
By contrast, heading into 2014, surveys found that “100 percent of strategists were negative on bonds,” Seidner added.
The biggest risks now for policymakers in the U.S., Europe and Japan are that they will miss their inflation targets and slip into deflation, said Willem Buiter, global chief economist at Citibank.
Europe faces the biggest challenge. The unwieldy European Union makes it difficult for the European Central Bank to respond aggressively to a worsening economic situation, conference speakers said.
“From the bond market perspective, Europe has become Japan,” Seidner said. “Europe perhaps is realizing that monetary union without political union is a suboptimal strategy.”
“In the euro area, we need to get out of the [fear of the] Weimar [Republic] hyper-inflation scenario” espoused by Germany in particular, said Buiter of his native country. “We are really looking at a deflation scenario.”