The comments by Fed Chairman, that they will start to taper the accomodative monetary policy, has send bond markets in to a shock,and has affected negatively the bond of Governments,Corporate, and emerging market debt.
The key question for investors is to assess whether central banks have changed the way they react to incoming data, or whether the incoming data have changed. This is particularly difficult in an environment where unorthodox policies like quantitative easing have become prevalent.
The Bank of England's Financial Stability Report this week warned in two consecutive sentences of the risks arising both from sharply higher interest rates and an intensification of the search for yield that has driven rates down.
Fed Chairman Ben Bernanke has been at pains to argue that the shift in Fed thinking is down to a better economic outlook, but that monetary policy will remain extremely loose.
Economic data will be the determining factor. If the data suggest a sustainable, accelerating U.S. recovery, then it could be painful for fixed-income investors. The degree to which the Fed can secure the short end of the curve will be vital. But weaker data might not be a panacea either: It will test the Fed's ability to communicate how the longer-term outlook, and hence the policy reaction, is changing. Either way, volatility is likely to stay high.
Excerpts from the WSJ
The key question for investors is to assess whether central banks have changed the way they react to incoming data, or whether the incoming data have changed. This is particularly difficult in an environment where unorthodox policies like quantitative easing have become prevalent.
The Bank of England's Financial Stability Report this week warned in two consecutive sentences of the risks arising both from sharply higher interest rates and an intensification of the search for yield that has driven rates down.
Fed Chairman Ben Bernanke has been at pains to argue that the shift in Fed thinking is down to a better economic outlook, but that monetary policy will remain extremely loose.
Economic data will be the determining factor. If the data suggest a sustainable, accelerating U.S. recovery, then it could be painful for fixed-income investors. The degree to which the Fed can secure the short end of the curve will be vital. But weaker data might not be a panacea either: It will test the Fed's ability to communicate how the longer-term outlook, and hence the policy reaction, is changing. Either way, volatility is likely to stay high.
Excerpts from the WSJ
