Money managers under the microscope
All Aboard the Good Ship QEII
Where will the fickle finger of the Fed point next? It’s a dilemma taxing asset managers trying to anticipate where the Federal Reserve will be spending its pennies once it starts its second round of quantitative easing. The Bank of Japan recently hinted that it might buy commercial paper, exchange traded funds and real estate investment trusts as part of its asset purchase scheme, so the Fed may not stick to T-bills and mortage backed-securities.
“Investors will need to look out for signals from central banks,” said Andrew Milligan, head of global strategy at Standard Life Investments, speaking at a briefing in London today. Milligan describes QE as “crossing the Rubicon” and pointed out that US government bond yields are grinding lower because hedge funds have jumped in to the T-bill market on the expectation that the Fed will start a second round of bond buying. If the yield for the 10-year T-bill dips below 2 percent, Milligan said, this would be getting close to bubble territory.
“That will continue until November and then we may see some profit-taking,” said Milligan. “There’s a lot of front-running going on.” Some of the upper estimates see the Fed expanding QE towards $3.2 trillion, which could lead to some frothy markets in equities and commodities as investors pursue the “risk on” trade.
For its part, Standard Life Investments is now broadly neutral on government bonds, having been heavily overweight six months ago. “As yields came down over the summer we have sold out in some portfolios,” said Richard Batty, global investment strategist at SLI. Instead, SLI is heavily overweight corporate bonds, and has been adding to high yield bonds as companies become more profitable.
If QEII doesn’t work, can we expect the Fed to try to inflate US debt away with QEIII? “We all worry about inflation in years four, five and six,” said Milligan, but he remains unpersuaded of the case for stockpiling gold, preferring to stick with assets able to deliver sustainable yields such as property and dividend-paying equities.