Markets Are "Misguided" In Betting The Fed Is Done, Bond Titan Warns
For the first time since the financial crisis, the bond market is now pricing in no more rate-hikes in this cycle
But, as Bloomberg reports, not everyone is convinced that the market has this right and that The Fed is done.
For one, The Fed's dot-plots are vastly out of line with what is priced into the market and to adjust so violently would likely spook investors more than the dovish tilt could be expected to calm them.
Sonal Desai, chief investment officer for the $150 billion fixed-income group at Franklin Templeton, has a stronger perspective, writing in her blog that:
“The market’s assumption that the Fed will not raise interest rates at all this year is very misguided, against a background of continued economic strength,”
“Expectations that the U.S. economic cycle is coming to an end are highly overstated.”
Additionally, Desai forecasts at least two hikes this year as policy makers respond to the risk that wage growth fans inflation.
"I think the Fed will continue to normalize monetary policy because the US economy has already shown it can withstand higher interest rates compared to where we are today**. When we saw the US 10-year Treasury move above 3% last year, there was some panic, some dislocation in the short term. But then financial markets stabilized, and the economy kept growing at a robust clip. Therefore, rising rates should not be a reason for investors to panic, in our view.
We will get periods of volatility in the year going forward, but active managers can take advantage of these periods to seek out potential opportunities."
That’s at odds with traders who’ve priced out the hiking cycle and have upped wagers on cuts in 2020.
Additionally, recession or not, pause or not, fun-durr-mentals are fragile at best; dismal at worst… but for now, stocks don't care as the squeeze continues.
rest at link graphic heavy
** the economy should be able to stand it however the system will not and cannot take rate hikes as every .25bp raise is just extra money coming out of it's pocket. Carrying costs for open positions increase.
Cap 1 Bonds finally 'get it' for now.
Cap 2 is recent activity with SPY equity performance vs actual earnings guidance
for a longer term view see
Cap 3 is the Bifurcation of the SPY and High yield credit since late 2012 that took off in 2013.
Thank you zombie banks pushing massive amounts of credit into the system for the sake of growth at any cost.
https://www.zerohedge.com/news/2019-02-02/markets-are-misguided-betting-fed-done-bond-titan-warns