Fed may struggle to persuade markets

Fed may struggle to persuade markets a September rate hike is coming

Anthony Gillham, manager, Old Mutual Voyager Strategic Bond Fund and Old Mutual Managed Fund, comments ahead of the US Federal Reserve’s policy decision today:

“The Fed has its work cut out if it wants to convince the market that it is serious about raising interest rates in September. Whilst US macroeconomic data appear to be in reasonable shape, falling commodity prices, renewed concerns about Chinese growth and its stock market, uncertainty over inflation and falling earnings growth in US companies are giving analysts pause for thought. As a result, bonds are rallying, meaning the policy statement doesn’t even need to be particularly dovish for investors to continue calling the Fed’s bluff.

In the absence of anything for the hawks to get their teeth in to, the short end of the US yield curve might get a reasonable bid as expectations would likely shift past even December into 2016: would the Fed really want to hike just as market liquidity dries up into year end? The implications for the longer end of the curve are somewhat less certain. Whilst caution over the macro outlook might weigh on yields, a further delay in the Fed’s first hike could cause investors to price in higher inflation in the future.

As a result, anything but an overtly hawkish tone to Wednesday’s statement is likely to increase the attractiveness of 5-year US Treasuries. Valuations don’t look so appalling, especially as real rates are positive and the term structure is quite steep – meaning even if we are wrong, yields would have to rise some way before we start losing money.”