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UBS Global Asset Management: Fed Facilitating A Controlled Descent, Or Prompting A Sugar Crash?

Key Takeaways from the Forum:

Curt Custard, Head of Global Investment Solutions, Chair of the Cyclical Market Forum (Chicago)

“Since 2009, financial markets have been racing around like a toddler with a bowl of candy. The recent volatility can be seen as the protest when the toddler is told the candy—which took the form of QE—will soon be taken away. That’s what we’re facing now. What’s really interesting from a portfolio construction perspective is that during this volatility, we’re seeing simultaneous selloffs in everything. Credit spreads are widening, rates are backing up and equities are selling off. That’s not normally what happens. However, this environment could create opportunities for investors willing and able to tactically move across regions and asset types.”

Joshua McCallum, Head of Fixed Income Economics (London)

“The recent volatility does not mean that we’re necessarily looking at a rout for fixed income, but it does indeed look like the long bond rally is over. In my view, the pace of the rise in yields is key. Yields could reach a point where the Fed will be forced to step in to control the descent—which could catch investors by surprise. Ultimately, the data will determine the Fed’s decisions, so we may be entering a new volatility regime with the market moving rapidly on surprises in economic data.”

Comments on Specific Asset Classes:

Scott Dolan, Co-Head of US Multi-Sector Fixed Income (Chicago)

“I think the Fed is leading us to a path of ultimate tapering. We just have no historical perspective to judge the impact of the end of QE on traditional fixed income assets. At a time when the risk-taking of the market-making community globally just isn’t there, the fear is that there’s no place to hide.”

Tom Digenan, Head of Core/Value US Equities (Chicago)

“Right now, high-dividend stocks have an 80% correlation with 10-year Treasuries, a relationship that we’ve never seen before. With rising rates, high-dividend stocks could see a lot of volatility. In our view, the areas that people think are safe are probably the most dangerous things out there right now.”

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