The US Federal Reserve is putting on a “manufactured and glossy” presentation to markets in an attempt to manage bond rates, according to M&G’s Richard Woolnough.
Mr Woolnough - who runs £26bn across M&G’s Corporate Bond, Strategic Corporate Bond and Optimal Income funds - said the recent sell-off in bonds, prompted by fears of the end of quantitative easing (QE), could help keep rates low.
“The Fed [needs] to get the party goers out of the bar with the minimum trouble,” Mr Woolnough said of the US central bank’s plans to slow the rate of QE this year. He said this meant the committee was “keen for us to see” a discussion of lowering the unemployment trigger for tapering to 6.5 per cent, from 7 per cent.
“This is akin to saying ‘drink up’ to a late night reveller, with the hint that once they’ve done so there is a chance the bar staff will pour them another drink,” the manager added.
“The Fed wants a steady bear market in bonds in this tightening cycle as it is still fearful over economic strength and fortunately inflationary pressures remain benign.”
Mr Woolnough argued that, as the Fed’s rhetoric is aiming to produce a “steady” bear market in long-dated bonds, the effects could mean a longer period of low interest rates.
“Monetary tightening via the long end [of the bond market] reduces the need for monetary tightening in the conventional way,” he said. “For example, the 100-basis-point sell-off in 30-year US treasury bonds since May has translated into a similar move higher in mortgage costs for the average American.
“If the Fed has its way in guiding a steady bear market in bonds, then bizarrely short rates could indeed stay lower for longer.”
The latest FOMC minutes, published last night, showed broad support across the committee for the tapering of QE but did not add any detail to that previously given by chairman Ben Bernanke.