Bond manager warns of 1994 re-run
GLOBAL - Paul Griffiths, the newly-appointed global head of fixed income at Aberdeen Asset Management, has warned that central banks are walking a "very fine line" with regard to the timing of rate rises and their withdrawal of liquidity from markets, drawing comparisons with the market turmoil of spring 1994.
"What worries me slightly is that we could be heading towards a February 1994 scenario, which is burned on my memory as a bonds manager," he told IPE.
"The Fed raised rates after a massive rally in government bond markets and all-time lows in 30-year yields - and the market fell right out of bed as a result. Money market funds were an important part of this latest crisis, and back in 1994 they led the panic: they had done corridor structures that depended on rates being set in a tight range, and the rises were a disaster."
The US Federal Reserve Funds rate had been at 3% since September 1992, the first rise of 0.25% came February 1994, and by February 1995 the rate had gone up to 6%. The fallout included a near 10% drop in the S&P500 over the course of three months, and one money market fund, the Community Bankers US Government Fund, "broke the buck", paying out 96c on the dollar to its investors.
But money market funds have tightened up their books significantly since the more recent crisis, noted Griffiths.
"Now I'm more generally worried that, when the market starts to see signs that central banks are reigning in their liquidity projections, they could react quite aggressively. We are not calling for a return to systemic collapse - this will be a ‘normal' correction, and that volatility in risk assets is in fact much more interesting to me as an active investor."
Griffiths' global rates team is "strategically bearish but tactically bullish" on government bonds, balancing the long-term effects of quantitative easing against the short-term potential for a flight to safety. "The central banks are going to have to walk a fine line, and we and the entire Street are watching them very, very closely," he said.
Griffiths formally completed the move to Aberdeen, with some of his team, from Credit Suisse Asset Management last week. Aberdeen acquired Credit Suisse's traditional asset management arm late last year.
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