29th October 2015
Nick Gartside, chief investment officer, fixed income at JP Morgan Asset Management, reacts to yesterday’s US Federal Reserve meeting and the bond market implications…
The Fed slightly altered the language regarding the future path of rates from a discussion of “how long to maintain” the current range to “whether it will be appropriate to raise the target range at its next meeting”.
As a result, the market’s expectation of a December hike has increased to about 50%.
At this time, we do not expect a rate hike until March, although, counter-intuitively, further QE in Europe and Japan and easing in China may reduce market volatility enough to marginally increase the probability of a December hike.
We expect additional rate hikes in 2016, taking the Fed Funds rate to 1% by year-end.
Over the medium term, we expect increased volatility as the market adjusts away from forward rate guidance, but that volatility will eventually be dampened by liquidity from central banks.
The divergence between policy rates in the U.S. and the rest of the world should contribute to a stronger dollar. The front end of the yield curve will be repriced to higher rates as we approach the initial rate hike.
Meanwhile, technical support for the long end of the curve will continue, resulting in a flatter yield curve.