The most recent notes released following the June meeting of the Federal Open Market Committee (FOMC) show members continuing to struggle to find an “elegant exit” from a period of extraordinary monetary easing, says Fran Rodilosso, fixed income portfolio manager for Market Vectors ETFs.
“On the one hand, it is encouraging to see a vigorous debate at the Federal Reserve (the Fed) and a willingness to consider novel approaches to unwind the previously unprecedented measures that have been put in place over the last several years,” says Rodilosso, citing discussions about tools like an overnight reverse repo facility. “On the other hand, I think there remains a high degree of uncertainty as to the efficacy of these policies, and that uncertainty continues to loom over the markets.”
Rodilosso (pictured) notes that as the Fed considers a variety of tools, it appears to be sensitive to the potential unintended consequences of its actions.
“They are trying to introduce a higher level of transparency, which is positive,” he says. “But they, and therefore we as bond investors, face so many unknowns over the next two years and beyond. Ironically, as a result of the current, extraordinary policy, the US Treasury market appears to be struggling to price in all of the uncertainty.”
The Market Vectors ETFs portfolio manager suggests that the recent period of low interest rate volatility and healthy first-half bond market performance may turn out to be the calm before the storm.
“What happens as the downward pressure on rates gets further relieved, if at the same time the Fed has not demonstrated that they have a complete handle on the process?” he asks. “No one knows for certain because we have never been in this situation before. Given all these uncertainties, caution is definitely warranted in my opinion.”