BofA ML Strategist Raises Red Flag; On Lookout for Higher Interest Rates
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Investors looking to stay one step ahead of the market are pondering a research note put out today by the Investment Strategy group at Bank of America Merrill Lynch. In the note, Chief Investment Strategist, Michael Hartnett, discusses his thoughts on higher interest rates in 2013.
For starters, Hartnett says higher interest rates next year would be a "genuine surprise". That said, he pointed out that since the Fed meeting last week, bond fund inflows have reversed.
"In just four days we've seen $2.5bn of outflows, which is on course to be the first weekly outflow in 30 weeks, and the largest outflow in 70 weeks," wrote Hartnett.
During the Fed meeting, Bernanke hinted at an exit strategy from its zero interest rate policy that targets 6.5 percent unemployment and stable inflation. Considering sickly employment figures, the announcement was far from a panacea for hawks. However, Hartnett's sees smoke.
"Currently, no one is positioned for higher rates," he wrote. "But if we get a disorderly Great Rotation whereby yields rise rapidly in response to stronger than expected economic growth, then many leveraged areas of the fixed income market (such as EM) are at risk. One thing to watch for next year is the relationship between yields and the dollar. A disorderly rotation would likely coincide with higher rates and a weaker dollar (as was the case in the US in 1994 and Europe over the past two years)."
For starters, Hartnett says higher interest rates next year would be a "genuine surprise". That said, he pointed out that since the Fed meeting last week, bond fund inflows have reversed.
"In just four days we've seen $2.5bn of outflows, which is on course to be the first weekly outflow in 30 weeks, and the largest outflow in 70 weeks," wrote Hartnett.
During the Fed meeting, Bernanke hinted at an exit strategy from its zero interest rate policy that targets 6.5 percent unemployment and stable inflation. Considering sickly employment figures, the announcement was far from a panacea for hawks. However, Hartnett's sees smoke.
"Currently, no one is positioned for higher rates," he wrote. "But if we get a disorderly Great Rotation whereby yields rise rapidly in response to stronger than expected economic growth, then many leveraged areas of the fixed income market (such as EM) are at risk. One thing to watch for next year is the relationship between yields and the dollar. A disorderly rotation would likely coincide with higher rates and a weaker dollar (as was the case in the US in 1994 and Europe over the past two years)."
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