The current generation bond traders could be badly caught out by the size of market moves caused by a regime change at the Federal Reserve, TCW’s Bryan Whalen has warned.
Whalen, who is part of the team overseeing $175 billion in assets at the US group, told Citywire USA that traders operating today have lived happily in world of accommodative central bank policy.
‘Over the past decade, the Fed, as well as the ECB and BOJ, has been micromanaging capital markets. It is like the FOMC has had a third mandate which is capital market volatility, that’s effectively part of what they are doing.
‘That approach has trained a generation of traders to buy the dip and that is almost how they underwrite risk. They say: “My risk is X because I know at this point central banks will come in and soothe that volatility”.
‘Should we have that regime change investors will be in for a shock. They will eventually be taught they will have to look back at fundamentals when they analyse risk,’ he said.
Whalen said his team is adopting a cautionary stance ahead of the expected change, which could see as many as five new faces on the Federal Open Markets Committee come February 2018. For the video in full, please click here.