A week after investors pulled out of low-grade bond funds at record levels, INGs chief investment officer Christine Hurtsellers said that the selloff is overdone.
Fearing that interest rates could jump up if the Federal Reserve tapers off its monetary easing policies, investors withdrew $4.63 billion from junk bond mutual funds and ETFs. It amounted to the second largest weekly outflow from overall taxable bond funds, but that anxiety is overblown and firms are jumping the gun on the Federal Reserve, Hurtsellers said.
The selloff we can see in some of these sectors such as agency mortgages, for example, that have been really impacted by the fear of the Fed leaving excess liquidity accommodation are overdone, Hurtsellers said at a briefing in New York on Tuesday.
Initial expectations for Federal Reserve tightening were as far off as June of 2016, but have moved up based on recent statements by officials. In a speech, the president and chief executive officer of the Federal Reserve Bank of Boston said on May 29 that, it may make sense to consider a modest reduction in the pace of asset purchased if we see a few months more of gradual improvement in labor markets and improvement in the overall growth rate in the economy.
ING is expecting that any step back by the Federal Reserve will happen much later in the year or early in 2014, and that it would not be catastrophic, according to Hurtsellers. Taper does not mean that they are going from their $80-plus billion monthly accommodation in fixed income to zero, she said.
Hurtsellers said that the Federal Reserve and its chairman Ben Bernanke were focused on inflation and not just unemployment numbers. Even as the employment picture improved, slightly rising interest rates would encourage the Federal Reserve to maintain their easing, she explained.
All people are talking about is the unemployment rate, Hurtsellers said. Real interest rates are rising in the selloff, so if youre the Fed chairman and youre seeing real interest rates rising thats not something you necessarily want this early on the cycle. We think interest rates are at least fair value.
It did not mean that there was a buying opportunity in long duration bonds, but there were some buying opportunities for high-yield fixed income assets, according to Hurtsellers.
The selloff in the near term is a bit overdone and has presented some nice opportunities to reload some of your risk levers in fixed income for the latter part of the year, she said.
Still, the long-term question remained an unknown, Hurtsellers conceded.
Is the market going to have peak volatility now because they realize the combination is going to go away or is this portending of a really brutal market at some point where there is a big movement to exit? She acknowledged: Thats something I dont have the answer to, but its certainly top-most in my mind.