BNY Mellon: Fed QE tapering won’t cause bear bond market


BNY Mellon chief economist Richard Hoey says the rise in interest rates brought about by the Federal Reserve’s plans for QE tapering marks the start of a five year “cylical normalisation”, rather than the beginnings of a bear bond market.

Hoey explains that the recent spike in interest rates following speculation over when and how the Fed will taper QE is “cyclically appropriate”, given the outlook for global and US GDP growth.

He says: “We continue to expect the current soft patch in economic activity to be followed by an acceleration of U.S. and global GDP growth in late 2013 and in 2014.

“The Fed’s contemplation of future actions to taper its quantitative easing program and the recent rise in intermediate-term and long-term interest rates appear to be cyclically appropriate.”

Hoey also stresses that the timing and nature of the Fed’s plans to taper QE is unlikely to have a negative impact on US economic expansion.

He says: “The Federal Reserve plans a gradual move from aggressively stimulative to merely stimulative, in response to evidence that the US economy is in a sustainable economic expansion.

“We doubt that this move to a somewhat less stimulative policy is going to disrupt the US economic expansion in any major way, although it may create volatile data in the short run.”

Indeed, Hoey adds that shifting monetary policy at a later stage in the business and monetary policy cycle could be more damaging for the US economy.

Hoey goes onto argue that any rise in interest rates as a result of QE tapering does not necessarily mean the start of a secular bear bond market.

He says: “There has been a recent ’bear steepening’ in the bond market, with intermediate and long-term interest rates rising even as short rates are firmly locked near zero by the Fed’s policy.

“We believe that a persistent multiyear upward drift in interest rates is now likely. The aftermath of the three decade-long decline in interest rates is likely to be labeled a secular bond bear market, but we prefer to view it in the context of the cyclical normalisation of interest rates that we expect over a half-decade period.”

At the same time, Hoey also says the rapid rise in bond yields witnessed recently may be enough to create a ”plateau in interest rates for the next several months”.