The Fed is only postponing tapering, says BlackRock’s Thiel
Scott Thiel, Deputy Chief Investment Officer of Fundamental Fixed Income and head of the Global Fundamental Fixed Income Team, comments on today’s ECB and MPC announcements.
What a difference a month can make. In this note last month we outlined some of the upcoming risks, ranging from economic data and monetary policy to the political and geopolitical.
We, along with most market observers, were surprised that the FOMC did not vote to reduce QE at its September meeting and by the dovish tone in the press conference. Our base scenario had been that the Fed would start to taper in September. That being said, the risks for disappointment had increased significantly following the rise in Treasury yields since the start of May (with the 10 year yield more than 1% higher1), the huge moves that we have witnessed in all fixed income asset classes since tapering was first suggested by FOMC members and September becoming a very consensus view. As such, we trimmed our short duration positions in the weeks preceding the meeting.
In our view the communication strategy employed by the Fed has been less than clear, resulting in even more uncertainty now on the drivers and timing of potential changes to monetary policy. While the delay in tapering has resulted in a brief respite for emerging market bond markets, for us this is only a pause and at some point in the next few months the Fed will start to withdraw liquidity. Between now and that point we continue to expect elevated levels of volatility around key data points.
We do retain our short duration bias in ‘risk-free’ rates and the view that yields in these bond markets will rise over the medium term. We are predominantly short duration in Treasuries, Bunds and Gilts.
Surprisingly, Larry Summers withdrew his name from the race to become the next Chairman of the US Federal Reserve mid-September. Despite his withdrawal we do not believe that a new Fed chairman, whoever it may ultimately be, will significantly impact the short-term course of Fed monetary policy.
This was just one of a number of political setbacks that President Obama experienced over the last few weeks, with the most recent and highest profile being the initiation of a partial shutdown of the US government after the political parties failed to agree funding. While this is embarrassing for all concerned and results in only a modest fall in economic activity (as government employees are effectively on unpaid leave), the far greater risk is the required extension of the US debt ceiling.
Italian political risk increased once again in recent days, after Berlusconi asked his ministers to leave Prime Minister Letta’s government. Following public dissent to this view by several of Berlusconi’s party members, he has now given Letta seven days to agree on disputed tax reforms. While we remain supporters of peripheral European government bonds we are currently neutral in Italy and Spain, preferring to express our views via Portugal, Slovenia and Ireland.
This is in stark contrast to the German election which, despite a coalition still needing to be formed, resulted in strong support for incumbent Chancellor Merkel and her CDU party.
Our overall positive view of the eurozone, while cognisant that there are still many event risks out there, led us to increase our short CHF position against the EUR as an expression of the ongoing unwind of safe-haven positions in financial markets.
Regarding today’s European Central Bank meeting, no changes were made to the current monetary policy tools. There was also very little change in the ECB’s assessment of growth, inflation and the appropriate course of monetary policy in the press conference. We have a short duration bias in Bunds given our view that over the medium term yields will continue to rise from their historically very low levels.