No ‘Massive Mark to Market’ Event for Bonds This Year: Friesen
By Madeleine Lim
Jan. 23 (Bloomberg) — While “shortage of yield” will provide support for stocks, unlikely to see “great rotation” out of USTs and investment-grade bonds this year, III Associates principal and Co-CIO Garth Friesen said in interview yesterday.
Growth set to be sluggish in major economies, earnings growth expected to slow down, driven by contractionary fiscal policies, particularly in Europe; tight fiscal policies likely in place for foreseeable future; supportive of fixed income
Central bank policy in major developed economies to remain highly accommodative,
With real yields negative across all maturities and central banks taking yield out of market, demand rising for carry-oriented investments; favors higher-rated HY, structured credit
While 10Y yields could rise another 25bps-50bps, sharp rise in UST yields unlikely as Fed purchases to support long end, while front end anchored by low-rate commitment; with thresholds unlikely to be breached this year or next, Fed to remain on hold
Bear markets in fixed income typically prompted by Fed policy tightening
Still some debate whether halt or curtailment of Fed asset purchases presents tightening; flow of purchases important to markets
Fed balance sheet not a near-term risk; balance sheet is a tool for Fed, which would only shrink balance sheet for policy purposes; given outlook for muted inflation, Fed not operating under time constraints
III has $2.3b in AUM, three lines: fixed income arbitrage, long-short credit, tail hedging business; mostly in G3/G7 currencies
Euro investments in swaps, funding markets, less exposure to sovereigns; credit exposure mainly U.S., some euro exposure
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