The discontinuation of unusually easy monetary policy in the US and UK raises the threat of a disruptive adjustment in financial markets, according to the June 2014 Bond Market Observations from Standish Mellon Asset Management Company, the fixed income investment boutique for BNY Mellon.
"No matter how well policy makers attempt to prepare markets for this inevitability, the threat of a disruptive adjustment in financial markets remains high, especially given the very low level of volatility," said Thomas Higgins, chief economist and global market strategist for Standish and author of the report.
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"Both the Fed and Bank of England have indicated they are likely to raise interest rates sometime in 2015 as long as their economies continue to perform in line with expectations."
In the June report, Standish lowered its 2014 forecast for global gross domestic product (GDP) to 3.3 percent from 3.6 percent. While 2014 was off to a slow start, Standish expects that recovering economies in developed markets will benefit emerging markets in coming quarters. Standish raised its inflation forecast for 2014 slightly to 3.7 percent from 3.5 percent.
"We continue to believe a pickup in emerging markets will benefit the performance of emerging market dollar and local currency debt," Higgins said. "However, the strength of the recent rebound in these markets suggests investors now will need to be more discriminating about where they put their money."
Among the regions viewed favorably by Standish are Latin America, particularly, Mexico, Brazil and Columbia.
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By GlobalDataIn the US, Standish said that faster growth coupled with a less accommodative monetary policy could result in higher Treasury yields and a stronger dollar.
