When Will the Fed Tap the Stimulus Brakes?

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Oct. 22 (Bloomberg) -- American Century Investments' David MacEwen and Payden & Rygel's Jeffrey Cleveland discuss the outlook for Federal Reserve monetary policy with Pimm Fox on Bloomberg Television's "Taking Stock." (Source: Bloomberg)

Chief investment officer for fixed income at american century investments great the idea that the stock market and bond market would rally on what was a miss in the jobs report of 140 8000 added to the payrolls, why did that happen?

It's all about the fed.

Tapering gets pushed out to march at the earliest.

A low accommodative interest- rate we have been seeing in place in the economy keeps moving along.

It's good for corporate earnings and good for the bond market to keep rates down.

Do you agree?

I do.

If you look at what the fed was looking for, it's a pickup in economic activity.

A pickup in the pace of job growth.

Wall street was looking for that and we didn't get it and we got 148,000 jobs.

The average has been 150. that's a slowdown from may when we were looking at 200 house and.

I think it pushes up the timeline for potential tapering.

That also pushes the timeline out to the first rate hike.

If that does not start to wind down tv until sometime next year.

They probably will continue throughout the year.

That brings the prospect for increasing the fed funds rate still on the horizon.

Do you have a calendar and can you tell us what is going to transpire in 2014? it is going to depend, but we think the economy is on a good track.

We will see growth that will enable them to start tapering, and i think they need to start tapering.

It is artificially low interest rates and they don't help fixed income investors.

It's forcing them out looking for higher yields and riskier aspect -- riskier assets.

Some are pushing into bank loans and unconstrained bond funds that end up being more highly correlated to the stock market.

The overall portfolio risk has been increasing as they search for yields.

If we get rates of four percent or so, by the end of next year, we will be able to find good yields in normal bonds.

If you have a four percent yields, what's that going to do to bond investors that hold their bonds at current levels?

Isn't that going to crush the capital western mark they will lose some capital over the short term.

If we see rates go up 100 basis points, bond investors could be down one percent grade not a big hit.

They don't have nearly as much exposure as a lot of them think they have.

It may not be just individuals who have exposures to interest rates, how are they going to move all of these bonds off their books?

Are they going to take a loss?

Lex there's a myth that higher interest rates are a bad thing.

Higher interest rates, while great for investing, we get to reinvest that higher yields.

The question i am asking is when do we get higher interest rates and what drives higher interest rates?

That means tapering has to begin in the fed has to be closer to tightening and growth has to be better and inflation has to be higher.

On all three of those counts, we are falling short.

I think you need to push off the timing of when interest rates will go off area what do you do if you do if you're looking for fixed income investments?

The worst thing you can do is stay in cash or stay short thomas does there's an opportunity cost in doing that.

We are looking for opportunities in the credit market and we think high yield will still be a place to go.

If you look at credit spreads, they don't tend to widen out.

We are forecasting more sluggish growth.

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