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JPMorgan Asset Bets Fed Can Keep Rate-Hike Cycle Intact for 2019

(Bloomberg) -- JPMorgan Asset Management is keeping faith in the Fed -- and taking a contrarian bet on U.S. interest rates to show it.

While many have given up on the Federal Reserve’s tightening path, Ramon Maronilla, a bond and currency investment specialist at the firm, says that view may underestimate the strength of the U.S. economy.

Even if American economic exceptionalism ends and growth levels converge toward the longer-run trend, the central bank isn’t likely to veer from its forecast for two more rate hikes this year, he said at a briefing in Hong Kong Thursday.

Maronilla sees opportunities for U.S. interest rates to surprise on the upside, and has built up holdings of futures which will pay out if the current consensus view that the Fed won’t move its benchmark this year proves mistaken.

“We could take advantage of this through eurodollar futures, and we’re doing this to some degree,” he said. The trade, which represents a small portion of JPMorgan Asset’s risk budget, would pay off if “our forecasts do play out and markets are wrong,” he added.

JPMorgan Asset Bets Fed Can Keep Rate-Hike Cycle Intact for 2019

It’s a view that contrasts with recent moves in money markets, where various gauges are signaling expectations for policy easing.

JPMorgan Asset also reiterated its preference for European and U.S. high-yield bonds, which they say may have been unfairly penalized considering their largely “conservative” balance sheets compared to the accumulation of debt at companies with higher ratings.

“We are seeing most high-yield companies have not exhibited irresponsible late cycle behavior that you would typically expect at this stage,” Maronilla said. “They have been fairly cautious in managing their balance sheet.”

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