Ever since May 22, when Ben Bernanke unleashed a bombshell by suggesting that the US Federal Reserve should pull back on its monetary stimulus, bonds and big stock markets have been hit hard.
Rather than running for cover, many big money managers have seen this selloff as an opportunity to invest in a wide array of assets at lower prices, allowing them to diversify their portfolio. They believe that the gloomy days may be overdone and that the concern with the Federal Reserve not throwing money at the economy forever is simply an overreaction.
The US economy had posted some sluggish growth figures. However, talks about an improving economy as well as a growing job market proved that investors had a golden opportunity here. In fact, the Euro zone debt crisis has decided to decline, along with the monetary union which has also established that it was no longer going to drag itself on world growth.
Traders with Big Investors such as Loomis Sayles & Company and Pacific Investment Management Company have been benefiting from this opportunity, with the potential of having ‘hot money’ being flushed in-and-out of the system.
According to Curtis Mewbourne, who’s a managing director and head of portfolio management for PIMO’s New York Office, (known to manage over $2 trillion globally), “We’re finding a lot of opportunities coming out of the volatility,”
On May 22nd, Bernanke said that the central bank, “could in the next few meetings … take a step down in our pace of purchases.” This comment however sparked uproar in volatility, which still hasn’t reduced. In fact, investors are actually recalibrating their expectations on lower bond yields that have increased borrowing and have encouraged investors to start taking investment risks on other asset groups.
Japan’s Stock market has actually plummeted 19% since that day. And last week, the 10 year Treasury yield hit an all time 14 month high. The BofA Merrill Lynch US high yielding index dropped to a 3 month low, the MSCI EM stock index benchmarked a slump of more than 17% this year, and the dollar itself is at an all time 4 month low as compared to other currencies.
The one place that Mewbourne is completely focusing on is government debt, although it’s considered to be highly ‘sensitive’ according to Federal Reserve expectations. He further went onto suggest that it’s the best time to buy 5-10 year treasuries, since the yields are expected to fall because the Federal Reserve has hinted that it won’t be stopping its stimulus program. He even sees more potential gains in mortgages, which are not guaranteed by the government.
The Federal Open Market Committee will issue its next decision on Wednesday, and quite recently the Federal Reserve officials have stated that inflation is significantly low, and could reduce the $85 billion-per-bond program, which is referred to as ‘quantitative easing’.
Mewbourne further went onto say that, “we think that the Fed will signal to investors that the markets have overly priced in expectations for a reduction in quantitative easing”.
Among many other assets that are being viewed by large money managers, they’re now eyeing high-yield debt, for both material and industrial stocks, along with some emerging market bonds and stocks. In fact, junk bonds have been hurting, especially because of the rise in Treasury yields, with Bank of America/Merrill Lynch High Yield Master Index dropping to 2.91% from its peak early on in May. And, according to Lipper, which is a Thomas Reuters company, the past 2 weeks have seen a substantial outflow of nearly $9 billion from high yield funds.