Henderson’s Pattullo: 50/50 chance of Fed abandoning taper plans

The heavy sell-off in the US treasury market over the past two months could force the US Federal Reserve to postpone its plans to begin reducing its asset purchase programme, according to Henderson’s John Pattullo.

Bond markets have suffered after the Fed indicated it may begin tapering its quantitative easing programme towards the end of 2013, with global bond funds suffering their worst month in 20 years in May and that slump continuing into June.

Notably, Pattullo (pictured) said the sell-off, which has seen yields on 10-year paper spiking from 1.66% at the start of May to 2.6% last week, has also weighed on the long end of the mortgage market.

He said a potential slowdown in mortgage demand would stunt the US economic recovery, which could lead the Fed to change tack.

“The Federal Reserve’s policy has changed, but in our opinion US economy is not strong enough – the worry is the market reaction might choke off growth so the Fed may now not taper, as the sell-off has had a particularly negative impact on mortgage-backed securities,” he said.

“It really is 50/50 now whether the Fed will abandon its plans as the treasury market is putting a lot of pressure on QE remaining in play.

“If growth falls outside of expectations and inflation remains low they will have to change course,” he said.

US inflation expectations have fallen over the last couple of months, and the headline inflation rate stood at just 1.4% as of end-May.

Pattullo noted the disappointing US growth figures reported last week could also have an impact.

The manager said there is now only a 35% chance that growth will remain stable.

“I think there is a 15% chance the economy grows faster on the back of all this, 35% growth remains stable, whereas I think there is a 50% chance the Fed backtrack as moves in the treasuries over the last couple of months have indicated that the market does not think it is right to end QE now,” added Pattullo.

However, due to uncertainty over whether the Fed will change its rhetoric, Pattullo said he is avoiding the treasury market, and has instead raised his cash position from 6% to 10% to fund new opportunities when the macro picture becomes clearer.

He is currently running a barbell approach in his £1.1bn Henderson Strategic Bond fund, with around 40% in investment grade and 40% in high yield.


This article was first published on Investment Week

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