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Investors continue to concentrate on QE exit
21 August 2013
Three quarters believe tapering will not harm recovery
Investors continue to see the smooth exit from quantitative easing as one of the top concerns facing the industry, Fitch Ratings has found.
The firm's Q3 European fixed income investor survey found that while overall, investors trusted central banks to be able to manage a smooth exit to QE, with 73% believing banks would be able to tighten policy without damaging the economic recovery, many thought there would be a negative impact on emerging market liquidity.
Two thirds of investors (66%) said they expected volatility in EM bond fund flows for the rest of the year as a result of doubts over the future of QE.
Joe Dyer, senior fund manager at asset manager RD Signature, said uncertainty and confusion over the US Federal Reserve's actions had led to financial markets to “hang on its every word while trying to decipher its most likely course”, with global impacts.
Benchmark 10 year UK government bond yield recently rose to a two-year high, with similar effects across the US and Europe.
“Given the size and the importance of the US financial system, this has had a global impact and has generally seen bond yields rise elsewhere and stock markets come under pressure,” he said.
With “unprecedented” levels of central bank support, Dyer added that yields had been reduced down to “arguably artificially low levels”, leading to concerns over whether the global economy would be able to cope when stimulus were to be removed.
“Here the Federal Reserve has something of a tight rope to walk: withdraw too early and risk undermining the recovery, leave it too late and risk asset bubbles and higher than desired inflation,” he said.