Don't bank on a dovish Fed: Henderson

Don't bank on a dovish Fed: Henderson

Investment managers who are positioning their portfolios for a modest US rate-hiking cycle could be in for a nasty shock down the track, says Henderson Global Investors.


Speaking at a lunch in Sydney, Henderson Global Investors head of fixed income, Phil Apel, said the market is currently priced in for US rates to "top out at about 2 per cent".

The US Federal Reserve is expected to begin 'lift off' of interest rates from their long-term zero level when the Federal Open Market Committee (FOMC) meets on 16 December.

"The average hike in US interest rates is around 3.5 per cent at about 20 basis points a month on average," Mr Apel said.

In fact, the Fed itself has indicated that the 'neutral' rate for interest rates is "somewhere between 3.5 and 3.75", which is significantly higher than the market is pricing in, he said.

"For me, the chances are it's higher than the market’s pricing. If you’re building your investment thesis on the fact that it will definitely be very, very slow, then you’re taking a risk," Mr Apel said.

However, he acknowledged that the Fed's 'blue dots' projection, which summarises FOMC members' outlook for rates, has consistently over-estimated the cash rate level in recent years.

"[The blue dots] have been slightly higher than the market. I’m not saying we’re going to go necessarily as far as 3.75 – for me, the question is, Will we go as low as 2 per cent?," Mr Apel said.

"For me, 2 per cent seems pretty low to be the terminal interest rate for a US economy in normal growth. If you want to weigh the balance of probability, the chances are it’s slightly higher," he said.

Henderson head of Australian fixed interest, Glenn Feben, agreed that the market is priced for a "very modest" cycle in the US over the next 12 to 24 months.

"The Fed will say all the right things at the start: 'It’s just a gradual journey, it’s just the start of the process'," Mr Feben said.

"The risk for the markets that we operate in is that as we go through next year, and the US economy continues to do fairly well, the markets may look to reprice that expectation and that would create some sort of volatility in bond markets," he said.

 

Don't bank on a dovish Fed: Henderson
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