Tags: Perrotta | bond | market | rate

TABB Group's Perrotta: 'Doomsday Scenario' Might Be Coming to Bond Market

By    |   Thursday, 09 October 2014 09:12 AM

The Federal Reserve's determination to keep interest rates low might spell doom for the bond market, says Anthony Perrotta, head of fixed income research at the TABB Group, a financial advisory firm.

"The fear is that the committed posture of the U.S. government [to low interest rates] may provide the impetus for a doomsday scenario in credit markets," he wrote on Tabbforum.com.

"While the market focuses so intently on the reasons to keep rates low, it may be blinded to the problem brewing just underneath the surface — the structural imbalance that is developing as the size of price takers (bond fund managers) grossly dwarfs traditional price makers (dealers)."

The Fed has kept its federal funds rate target at a record low of zero to 0.25 percent since December 2008 and isn't expected to raise rates until mid-2015.

"Investors have been flocking to corporate bonds like fans lining up for the next summer blockbuster," Perrotta said.

"A crowded theater is no place to be when Mrs. O'Leary's cow starts a fire. Was June's swoon [by high-yield bonds] a prequel to an even greater show, one that starts with a fire and ends up with a simultaneous rush for the exits?" he asked.

"The boogeyman under the corporate bond bed may never rear his head; but if he does, he’ll do more than just frighten us. . . . There are simply not enough providers of immediacy to facilitate the enormous demand to transfer assets if things go awry," Perrotta added.

"If the Fed succeeds, the current market structure will serve us well. But if it veers off course, the results could be disastrous."

There was no rush for the exits Wednesday. Two-year Treasury yields dropped the most in more than a year, after the minutes from the Fed's latest meeting showed policymakers expressed concern that the U.S. economy is threatened by a global slowdown and stronger dollar.

"The market seems to be keying off of some of the risks highlighted, the number of uncertainties for the global economy," Christopher Sullivan, chief investment officer at United Nations Federal Credit Union, told Bloomberg.

"Fed policy could remain somewhat more accommodative."

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The Federal Reserve's determination to keep interest rates low might spell doom for the bond market, says Anthony Perrotta, head of fixed income research at the TABB Group, a financial advisory firm.
Perrotta, bond, market, rate
359
2014-12-09
Thursday, 09 October 2014 09:12 AM
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