How long will paranormal activity continue?
Likely until investors finally get clarity around when the Fed will act. If the Fed can convince markets that short-term interest rates won’t spike again like in May-July of this year, then the next taper conversation may be less bumpy for markets. That, however is a big ‘if,’ and the Fed may not be able to orchestrate such an outcome. While we expect tapering of the Fed’s bond-buying program to be deferred into next year, the possibility of the Fed moving sooner than markets expect represents a key risk to the short-term outlook.
What does this mean for investors?
Given the market consensus that the economy isn’t healthy enough to advance without accommodative Fed policies, we now see greater downside than upside to the risky segments of fixed income (high yield bonds, bank loans and securitized assets). While longer term we continue to view these asset classes favorably, our downgrade to “neutral” from “overweight” reflects their diminished risk/reward tradeoff over the next one- to three-months.
Jeffrey Rosenberg, Managing Director, is BlackRock’s Chief Investment Strategist for Fixed Income, and a regular contributor to The Blog. You can find more of his posts here.