Following last night’s release of minutes to the December FOMC, David Roberts, head of the Liontrust Global Fixed Income Team, comments:
“For over a decade, Central banks have pushed a cheap money policy, ostensibly to create inflation, in reality to fight crises both real and imaginary. You can now find a definition of ‘Quantitative Easing’ in the Oxford English Dictionary. QE boosted almost all financial assets, distorting the relationship between value and growth, promoting an explosion in alternative asset classes from housing to crypto.
With inflation way above target and set to remain there for some time, the US Federal Reserve is now discussing ‘Quantitative Tightening’ – selling some of those bonds it has hoarded back to the market, possibly pushing up market interest rates.
Is QT likely to happen soon? No. However, we all know markets are forward looking and just three trading sessions into the New Year bond yields have already gapped higher.
It’s not just boring bonds: see the importance of that across your entire portfolio; the Dow Jones index has outperformed the Nasdaq by 3.5% in three days, Bitcoin tumbled nearly 7% year to date.
If markets start to believe the world’s central banks are serious about tightening monetary policy, the market moves and rotations of the past few days may be a mere precursor of much more to come.”