Verbal easing’ of central banks benefits fixed income market

With markets still volatile and interest rates set to remain low, fixed income is still worth consideration, Nick Gartside of JP Morgan has argued.

Gartside, international CIO for fixed income, said that recent statements by Ben Bernanke, chairman of the Federal Reserve and Mervyn King (pictured), governor of the Bank of England, about the continued need for QE, were good for fixed income markets, reminding investors that the world remains a dangerous place. Gartside called such statements “verbal easing”.

Gartside went on to warn that the greatest threat would lie in an increased cost of capital. “Perversely, with a lot of the systemic risks contained (at least in the short run) the real risk is probably that the incipient recovery forces risk free yields meaningfully higher, an act in itself that raises the cost of capital to a punitive level and chokes off the recovery. Recent central banker jawboning suggests that they are alert to this and will lean against this risk. Portfolios, with healthy allocations to spread sectors are well positioned as we move to navigate the next quarter,” he said.

Gartside went on to say that government yields still looked unattractive, while emerging market debt and high yield, were showing good fundamentals and valuations.

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