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Fed in focus: top bond managers on what the minutes mean

Fed in focus: top bond managers on what the minutes mean

Leading bond managers have cast doubt over the Federal Reserve’s ambitions of four rates rises in 2016 following the release of the latest FOMC minutes.

Details of the decision-making that led to the first post-financial crisis rates rise at the central bank’s December meeting were released on January 6.

At the heart of the minutes was the confirmation that the decision to raise rates was unanimous, but the actual timing was more of a ‘close call’ owing to persistent low inflation.

In response, market veteran Jeffrey Gundlach, who is Citywire AA-rated and oversees billions of dollars in bond assets at DoubleLine Capital, said the meeting minutes called into question whether the Fed will actually hit its four targeted rate rises for 2016.

Speaking to Citywire Americas, he said: ‘Since December said it was a close call it might mean that our predication at DoubleLine which, we’ve been stalwart in, is that they’re going to raise rates a lot less than people think. I think a few members fear that markets are not going to be cooperating.'

As this is the scenario DoubleLine expected, Gundlach said his strategy remains the same. 'We are respecting the fact that junk bonds are continuing to struggle and they are now being joined by stocks.

‘We’ve been light on corporate credit and we think that’s appropriate despite the fact that many bond managers have been talking for months now about the great buying opportunity that junk bonds represent.’

Co-director of global fixed income at Eaton Vance, Eric Stein, said since the meeting the Fed has taken a bit more a hawkish tone, which is worth paying attention to. He added that inflation is still the key to the Fed’s moves.

Federal Reserve vice chairman Stanley Fischer, speaking on CNBC on Wednesday, said the market is underestimating how many interest-rate increases the central bank will undertake this year.

Stein added: ‘It’s important to look at speeches like Fisher’s regardless of what they said at the December meeting. It’s still an aspirational goal for four rate rises. Sure if we consistently have market days like the last three that might put them off, but it’s not going to be like that throughout 2016.’

Brendan Murphy, director of global fixed income at Standish, a BNY Mellon affliated firm, believes the majority of the board members are still comfortable with normalizing rates.

He added: 'Our base case is that you will see three more rate increases from the Fed over the course of the year which is slightly higher than what the market has priced in.  This outlook seems entirely dependent on how the inflation picture evolves.  We’re looking for inflation to rebound to 1.7% this year which should give the Fed scope to raise rates three times.  The risk to that view is continued pressure on commodity prices.' 

Speaking to Citywire Selector in London, David Ric, head of absolute return and fixed income at Amundi, said: ‘The market has been confused by the comments, especially given the uncertainty we have seen globally at the very start of the year.

‘In fact, given the further fall in oil, for example, I would say that the potential for a further rate hike at the March meeting has fallen to just 20% probability. This is because the market was confused by the dovish tone given when rates rose and the more hawkish views now.'

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