FIXED INCOME MONTHLY

Life after monetary policy

Sep 19, 2016 / By Jeffrey Rosenberg

Fixed income highlights

  • Is there life after monetary policy? Higher U.S. yields anticipate an increased likelihood of Federal Reserve (Fed) hikes in September. The European Central Bank (ECB) deferred providing more accommodation and market expectations are high for the Bank of Japan (BoJ) to further its accommodative stance this month.
  • Is there life left in monetary policy? The more pressing concern, however, is whether there remains life left in today’s monetary policy. The ECB and the BoJ arguably face this question more than the Fed, as their economies demand further stimulus measures that will require even further iteration in the near-term policy toolkit.
  • Money market reform hits the municipal market. We update our tracking of money market reform impacts in the short end of bond markets. The October 14th regulatory implementation date is leading to substantial outflows from prime and, perhaps unintentionally, tax-exempt money market funds.

Strategy and outlook

The impact of impending regulatory reform appears to be accelerating in short-term bond markets, providing one of the few clear opportunities for investors. Recently, this appears to have spread into the front end of municipal curves, providing flexible investors the opportunity to deploy cash for attractive near-term returns. More broadly, while Jackson Hole highlighted the Fed’s belief in the efficacy of its longer run toolkit once policy has normalized, near term, investors may take little solace in such reassurances as they come with the acknowledgement that current monetary policy holds less capacity to provide accommodation were it to become necessary. We anticipate movement away from the bond QE + negative rate flattening of global yield curves over the past several years, leading to less flattening pressure—and less preference for the long end—in the U.S.

Jeffrey Rosenberg
Chief Fixed Income Strategist
Jeffrey Rosenberg, Managing Director, is BlackRock's Chief Fixed Income Strategist with responsibilities in developing BlackRock's strategic and tactical views on sector allocation within fixed income, currencies and commodities.
Jeffrey Rosenberg
Chief Fixed Income Strategist
Jeffrey Rosenberg, Managing Director, is BlackRock's Chief Fixed Income Strategist with responsibilities in developing BlackRock's strategic and tactical views on sector allocation within fixed income, currencies and commodities.