Bond investors that banked on unlimited quantitative easing were "in denial", according to one asset manager, explaining the "violent" market reaction to the Federal Reserve's warning that its bond purchasing program could soon be scaled back.
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"A lot of bond managers, in the name of 'don't fight the Fed', have been assuming that the unlimited liquidity will go on forever. I think they were in denial about what the Fed has said, but it kind of hit them between the eyes this time," said Jim McCaughan, president of global asset management at Principal Financial Group on the sidelines of the FundForum conference in Monaco.
"Some people are using the phrase the 'new normal'. I tend to use the phrase 'the return-to-normal', which is the market setting rates," he added.
Global bond yields rose sharply after Fed Chairman Ben Bernanke said last week that the central bank could reduce its $85 billion monthly bond purchases by year-end, if the U.S. economy continues to improve. U.S. 10-year Treasury yields neared 2-year highs on Bernanke's words and stock markets have had volatile swings. The Dow Jones and the S&P 500 have both fallen 5 percent from market peaks.