Bonds Over Equities
Matt King, global markets strategist, Citigroup:
Market pricing is too bearish on long bonds and still too optimistic on equities.
As the Fed embarks on the tightening and actually withdraws liquidity, we will go back to the same negative performance on risk assets that we saw earlier this year and last week. And on that, we are more pessimistic than consensus. A useful rule of thumb is roughly a $1 trillion dollars of QE or QT is worth about 10% on the equity market over the course of the next 12 months or so.
Still Liking Credit
Kelsey Berro, fixed-income portfolio manager, JPMorgan Asset Management:
For now, recession is not currently our base case, and we maintain investments in investment-grade and high-yield credits. With the fed funds rate still close to zero, the labor market red hot and the economy operating above potential, risk assets like credit should still find sponsorship.
The Fed has telegraphed the QT strategy in the near term. From that perspective the bond market has likely priced much of the announcement.
Over time, the bigger driver for yields and the shape of the Treasury curve will ultimately be the path of the policy rate.
Short-Term Government Debt
Bob Stoutjesdijk, portfolio manager, Robeco Institutional Asset Management:
The Fed won’t be able to achieve an economic soft landing as they raise interest rates and withdraw liquidity through QT. The economy will slow down later this year, heading into a recession.
Our positioning is conservative, we favor short-maturity government bonds, are underweight credit and cyclical FX while being overweight swap spreads.
We like government bonds, but keep duration conservative. There is value building in two- and three-year government debt of the U.S. and the U.K., because their yields have come a long way, and we don’t think the Fed and other developed-market central banks will be able to hike interest rates at the pace that the market has priced in. Similar opportunities are building in Canada, New Zealand, and Australia.
Buying Treasurys
Jack McIntyre, portfolio manager, Brandywine Global Investment Management:
We are buying Treasuries as a defensive play and paring back on risk assets because we expect growth to slow down and bonds to recover in the next few months. Risk of stagflation is rising, but the market is currently focusing more on the high inflation component of it. I suspect that soon we will have to focus on the slowing economic activity part of stagflation.
We are going to have a massive reduction in liquidity and I’m worried a bit about that. I’m not sure if the Fed has a total grasp on QE or QT. They keep telling us it’s going to be on an auto-pilot and we should not be worried. But the last time they did QT, the equity market didn’t seem to like it at all.
This article was provided by Bloomberg News.