“Markets are very liquid now as opposed to when QE first took place,” said Adrian, who created the ACM model with Richard Crump and Emanuel Moench. It’s not clear the term premium drop-off will be “symmetrically undone with balance-sheet tapering. There is also the issue of how large the balance sheet will be, and its composition, which have implications” for the term premium.
All that leaves Deutsche Bank’s Chadha feeling good about the economy and risk assets, particularly if, as he expects, U.S.-China trade tensions ease. He sees the S&P 500 reaching 3,250 by year-end.
“Maybe the bond market is distorted,” he mused, “because the Fed has done things they have never done before.”
This article was provided by Bloomberg News.