A victory for Republican presidential nominee Mitt Romney may result in bond and stock selloffs as markets bet on an end to monetary stimulation that has buoyed assets from government debt to mortgages, according to Deutsche Bank AG.
Investors should sell intermediate-maturity Treasuries and shorter-dated, inflation-linked debt to hedge against a Romney win versus President Barack Obama on Nov. 6, said Dominic Konstam, global head of interest-rates research in New York at Deutsche Bank, one of 21 primary dealers that trade Treasuries with the Federal Reserve.
“The market has been lulled into a false sense of security that nothing is going to change with regards to monetary policy,” Konstam said in a telephone interview. “If Romney wins, the market will assume the worst -- that they are less supportive for accommodative policies -- and that will take away some of the feel-good factor for stocks and bonds that Bernanke has engineered.”
Romney, a former Massachusetts governor, has said he would not reappoint Fed Chairman Ben S. Bernanke, whose second four-year term expires in January 2014. Lanhee Chen, Romney’s policy director, said Sept. 13 that more bond purchases are “further confirmation that President Obama’s policies have not worked.”
The Fed announced Sept. 13 it will keep its main interest rate at almost zero until at least mid-2015 and buy $40 billion of mortgage debt every month under its quantitative-easing program in an effort to stimulate economic growth and create jobs. The U.S. unemployment rate unexpectedly fell to 7.8 percent last month.
“The markets are hardwired to the ultra-accommodative stance,” Konstam said. “A Romney wins threatens the credibility of the extended-period language.”
Bernanke said the central bank hasn’t taken into account the November presidential and congressional elections in its decisions. “We have tried very hard to be non-partisan and apolitical,” he said at a press conference. “We make our decisions entirely on the state of the economy.”
Romney has narrowed the race. A Washington Post/ABC poll released Monday put Obama’s lead nationally over Romney at 49 percent to 46 percent, within the survey’s margin of error of plus or minus 3.5 percentage points. The poll of 923 likely voters was conducted Oct. 10-13.
It is unlikely that Romney will be as harsh as his campaign rhetoric suggests as “it doesn’t make sense for either candidate to not support an ultra-accommodative policy when they are in office,” Konstam said. “But the market will assume the worst unless Romney moves quickly to calm down those fears.”
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