The Fed is about to bestow more gifts on the market, stoking a new phase in the risk rally, according to Morgan Stanley Investment Management portfolio manager Jim Caron.
With the Federal Reserve poised to adopt a policy that could suppress rates for years to come, Caron is adding higher-yielding debt including from emerging markets to Morgan Stanley’s global fixed-income funds.
“They want to make riskier assets even more appealing,” said Caron, whose team at Morgan Stanley Investment Management in New York oversees $665 billion. “That will help high-yield, asset-backed securities, emerging market debt and equities.”
Under the new Fed approach, policy makers may tolerate a run-up in consumer prices above their 2% target before tightening policy. For markets, the big takeaway is the prospect of zero rates for five years or even longer.
On the flip side, the prospect of hotter inflation is stoking demand for hedges such as gold and CPI-indexed bonds. Longer-dated debt in particular is sensitive to changes in consumer-price expectations. Yields on 30-year Treasury benchmark bonds are trading near an eight-week high of 1.45%.
