Shock and surprise has taken centre stage as fund managers react to Federal Reserve chairman Ben Bernanke’s decision not to curtail asset purchases.
Investors had largely priced in the September meeting of the Federal Open Market Committee leading to the first signs of a slowdown in the $85 billion-a-month bond-buying programme.
However, Bernanke, who is set to step down from the central banker role in January, instead opted to maintain the current pace.
Here Citywire Global has collated the immediate responses of some leading fund managers to uncover what this means for QE, the future of the Fed and portfolio positioning.
Buy now, taper later
Citywire A-rated manager Iain Stealey, who oversees 11 bond funds at JPM, believes the announcement could prompt short-term buying.
‘Yesterday’s move has taken us back to the old adage of ‘don’t fight the Fed’, as it appears that they are not in the mood to take any chances with the economic recovery underway.’
‘Tapering is going to happen at some point, but it’s going to be very data dependent. We will wait for the dust to settle before altering view on core rates.’
‘In the medium-term, the drift higher in yields should continue, but the next few months is now less clear and short-term we could see some buying.’
‘Biggest game of “Chicken” the world has ever seen’
Bond veteran Stewart Cowley of Old Mutual believes there is nothing to cheer about in the Fed’s decision to stay the course.
‘This is an extremely disappointing reaction by the Fed. Clearly, they have taken note of the slowdown in the accumulation of bank assets since their miscommunication in June and July that sent bond yields up by nearly 1.5% and have extrapolated that into the housing market.’
‘But the market reaction just shows how hooked on the QE process the US economy still is five years after the collapse of Lehman Brothers.’
‘This is nothing to cheer about; it will make the eventual day of reckoning even worse for the bond and equity markets.’
‘I suspect the euphoria won't last long ; we are now engaged in the biggest game of "Chicken" the world has ever seen - investing in US government bonds has become the equivalent of running into the middle of the motorway to pick up pennies.'
Bernanke is trying to bend investors’ minds
The decision not to taper shocked Trevor Greetham, director of asset allocation at Fidelity Worldwide Investment, who says the Fed is now toying with investors.
‘This was one of the most surprising central bank meetings in a very long time with the Fed deciding not to start tapering quantitative easing despite widespread expectations in the market with a rationale close to the incredible.’
‘The Fed now “could” taper by year end and Bernanke is even talking down the importance of the unemployment rate as an indicator of when tightening may start and end.’
‘He seemed to be making policy on the fly, at one point accepting that they should maybe agree not to taper if inflation drops below a particular level.’
‘You’d be forgiven for thinking the Fed is playing with your mind at this point. They’ve intervened massively in the markets and don’t like the feeling when the markets react negative to talk of exit.’
‘There’s a “Bernanke put option” here for bonds and stocks, preventing asset prices from falling too fast, but the way I see it the strike on that put will gradually ratchet lower.
Tough task awaits Bernanke’s heir
BlackRock fixed income CIO Rick Rieder says the poor communication of the decision not to taper leaves a lot of fences to mend for the next Fed chairman.
‘The decision not to taper – coupled with the lack of guidance on when tapering may finally take place – brings down our view on the range for movement in the 10-year Treasury by roughly a quarter point to 2.50% to 2.85%.’
‘But the range could vary even more widely -- and investors may face more volatility -- amid the next few weeks of economic data, U.S. budget showdown and debt-ceiling debate and the nomination of the new Fed chief.’
‘The significant divisions over monetary policy exhibited in the details of yesterday’s decision mean the next Fed Chairman will have a huge and vitally important task in reconciling the views of policy makers and communicating them clearly to markets and investors.’
Wait-and-see policy at play
Fund manager Wayne Lin of Legg Mason believes Bernanke held fire due to on-going budget battles in the US government.
‘The Federal Reserve surprised markets today by postponing the tapering of asset purchases associated with its quantitative easing program. Market expectation was for a reduction in asset purchases from $85 billion to $75 billion per month.’
‘The initial market response was positive, with equities and bonds both gaining. The Fed was probably concerned about the recent, steep rise in mortgage rates, which was a direct result of expectations that the Fed would begin tapering soon.’
‘The Fed may have also been concerned about the upcoming budget battle in the U.S. Congress and decided to postpone tapering until after the budget is resolved.’
Taper delay allows uncertainty to reign
According to David Harris, fund manager on the US fixed income team at Schroders, holding fire on tapering opens up the market to increased volatility.
‘No one saw this coming. Everything in the run up to the FOMC strongly suggested they would begin to taper. In Bernanke’s comments he lists a variety of reasons to hold steady for now, but the most interesting one is the increase in mortgage rates – which the Fed provoked with the taper talk.’
‘The Fed decision to hold asset purchases constant was a surprise to markets. Clearly there is concern about the recent softer tone to economic data, part of which is from the impact of higher market borrowing costs.’
‘Downward revisions to 2013 and 2014 growth forecasts reflect the reality of on-going tepid economic activity.’
‘Shorter term interest rates are so far rallying much more than long rates, showing that the taper was fully priced in to long yields while the lower growth expectations should mean short term rates held near zero for longer.’
‘Ultimately the Fed will still need to scale back purchases. Not tapering now prolongs the uncertainty, and market volatility will remain high until the Fed is able to provide more clarity about their QE exit strategy.’
Firm focus on all new data points
Volatility was also the concern of Pioneer’s head of European fixed income, Tanguy Le Saout, who expects increased scrutiny of all future communications.
‘Summers out and there's no tapering, it does not get better than that for a mini rally. The announcement has come as a big surprise.’
‘At the beginning of the month, we felt the fed had engaged some of its credibility by preparing the markets for the start of tapering. The whole discussion was around a reduction of $10 or 15 billion, and in the end, we got zero. The market knee jerk reaction is a natural one, but what will come next?’
‘The Fed failed to deliver on what they prepared the market for, at least a moderate start of tapering, now the market will pay extra attention to future economic data release. It's always about data ultimately, but with no clear communication we should expect more volatility going forward.’