In a bid to keep interest rates low, Fed chairman Ben Bernanke announced Operation Twist, a bond-swapping strategy that will involve $400bn of short-term bonds sold off in order to buy long-term debt. The plan is that buying the bonds will push prices up and cut yields.
The move came a day after the UK’s Bank of England hinted it was looking at further quantitative easing.
"Given that much of the deterioration in investor sentiment and the sell-off in risk assets over the summer has related to a fear factor that has been feeding on itself, it was important for the Fed not to under-deliver," said Philip Poole, HSBC’s global head of macro and investment.
"By stressing the downside risks to growth, the markets’ initial reaction has been negative."
The FTSE was down by more than 5 per cent at mid-afternoon today.
Mike McCudden, head of derivatives at Interactive Investor, says private investors have been shaken by the move.
"Operation Twist didn’t inspire investors. Combined with Bernanke’s bleak outlook for the global economy, traders turned to despair and Treasury yields showed a muted response," he explained.
"The Fed's decision ignores calls for short-term market support. It believes Operation Twist is a weapon, which will help the US economy weather the storm in the longer-term."
Many managers insist there are still investment opportunities out there. Rick Patel, manager of Fidelity’s US Dollar Bond fund, says short-dated, high-quality corporate bonds are a good buy right now.
"These entities continue to hold sizeable amounts of cash and liquidity on their balance sheet. On the short-dated part of the US curve, I continue to believe that a move out of short-dated treasuries into highly-rated, short-dated corporate bonds, in order to benefit from a higher-yield pickup, continues to be a good strategy."
Performance of fund vs sector over 3-yrs
Source: FE Analytics
According to FE Analytics data, Patel’s fund has returned 6 per cent, 29 per cent and 32 per cent over one, three and five years respectively, beating the average fund in the sector over each period.
"The corporate names that I prefer have been domestically focused with minimum exposure to international markets," Patel added. "The exception to this is where there are large blue-chip names where corporate cash flows and revenues are stable and are derived from a diverse number of countries/currencies."
Macro strategists, however, say it is too little, too late. Saxo Bank’s Mads Koefoed says it is time to let the global economy heal on its own.
"Bernanke runs the risk of arriving too late at the party with a solution for the second time in 10 months. His QE2 programme last November came so late that the economy had long rebounded, and QE fuelled a massive commodity rally instead, which ultimately weighed on US consumers in the first half of this year and forced the economy into a halt yet again," he explained.
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