General tone remains on Fed rates
As expected, the Federal Open Market Committee’s June statement on monetary policy and the accompanying SEPs (Summary of Economic Projections, or the “dot plots”) signalled a subtle change from that of April, suggesting that we are on track for a rate hike this year. The Committee improved its economic outlook, but did not change its tone regarding inflation and inflation expectations. It also reiterated that the timing of the initial hike remains data-dependent.
Consistent with the Chair’s guidance, over the near term we expect two rate hikes in 2015 – in September and December – with a year-end fed funds rate of 0.75% (the top end of the range, which is currently 25bps). We expect an additional 4 rate hikes in 2016 to 1.75% by year end. With that will come continued moderate volatility.
Over the medium/longer term, we expect increased volatility as the market adjusts away from forward rate guidance, but that volatility will eventually be dampened by liquidity from central banks.
In terms of how we’re investing, our current positioning reflects a preference for credit vs. duration risk, with exposure to high yield bonds and bank loans. We also have a small overweight to selected currencies, including the U.S. Dollar and the Mexican Peso, which is funded primarily with short positions in the Euro and the Yen.
We take a global unconstrained approach, with the flexibility to access our best ideas whilst avoiding areas of concern. This allows us to actively manage both curve positioning and duration, important considerations in a period of interest rate uncertainty. We’re currently positioned with a curve flattening bias and we’re maintaining a low sensitivity to interest rate risk.
Iain Stealey is fund manager of the JPM Global Bond Opportunities Fund