Fed tapering a very high event risk for fixed interest markets in September – BlackRock

5th September 2013

September is set to be a month of ‘event risks’ including a very high risk of tapering by the Fed says BlackRock’s fixed income expert Scott Thiel.

Thiel, the deputy chief investment officer of fundamental fixed income, says that despite the decision by the Bank of England and European Central Bank, the fund managers is maintaining a short duration bias in both German Bunds and Gilts.

He says the firm’s medium term view is that so-called ‘risk-free’ rates will continue to rise from their historically very low levels.

“September is proving to be a month of event risks, ranging from economic data and monetary policy to the political and geopolitical, which have the potential to raise volatility in financial markets,” he adds.

“The prospect of a reduction or ‘tapering’ of quantitative easing (QE) in the US, which is currently running at a total $85 billion of treasury and mortgage purchases per month, has continued to be a key driver of fixed income markets with investors focusing on key data points and announcements pertaining to US growth and unemployment.”

He says that many investors have priced the expectation that Chairman Bernanke will announce a reduction in QE after September’s FOMC meeting on 18th September.

“The event risk around this is very high. As such, while we retain our short duration bias for risk free rates and our base case scenario is for tapering to commence this month, we trimmed some of these positions over the last few weeks to reduce risk ahead of the meeting.”

The German electorate go to the polls on 22nd September. So far polls suggest that Chancellor Angela Merkel looks set to retain her position but we are watching events closely, not least because the political debates and rhetoric may point to the issues that will take centre stage once a government has been formed”.

The final risk is geopolitical given the Syrian crisis.

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