“Can you be late in terms of moving monetary policy and be gradual? I don’t think you can. I think that is an inconsistency,” Bill Bovingdon, chief investment officer of Altius Asset Management said.
“To a degree, that is what is priced into financial markets, i.e. a continuation of near zero interest rates for the next two years, and then three to five years of gradual rate rises after that,” he added. “I think that is very unlikely to be what transpires.”
Altius believes there will be three stages: firstly, a tapering of quantitative easing, then a bringing of the Fed’s fund back up to neutral, and finally some inflationary risks.
According to the firm, we are currently well into the first stage. However, expectations that the transition to the next two stages will be a smooth one are unlikely to bear fruit.
“Surely the Fed can’t spend five years bringing the Fed funds back up to neutral. I think that there will be another sell-off in bonds, but primarily that will be in 2014,” Mr Bovingdon said.
Further down the track, Altius believes there will be a need for inflation risk premiums to be rebuilt into the bond market. However, the asset management firm does not believe this process will cause a crash.
“[These stages] will be a gradual process though, and certainly not a straight line sell-off, and that means that bond investors, whilst they would be wise to take some preventitive measures over that period to ensure they don’t sell off at a capital loss, we are not looking at a re-run of [the 1994 crash],” Mr Bovingdon stated.
