If Romney had won the election, he wouldn’t have reappointed Bernanke as chairman of the Fed.
Since Obama came out on top, however, Bernanke can remain in place until the end of his mandate, says John Braive, vice chairman, Global Fixed Income, CIBC Asset Management. He co-manages the Renaissance Real Return Bond Fund, Renaissance High-Yield Bond Fund and Renaissance Canadian Bond Fund.
This means the monetary policy he’s implemented over the last four years will also remain intact, he adds. In particular, “short-term interest rates will stay in the 0%-to-0.25% range that’s been in place for a number years.”
They’ll also remain low until late 2014, which gives investors a clear view on what’s going to happen with rates over the next few years.
“That’s what really anchors the curve,” says Braive. “If your short-term rates are low and stable, there’s not a lot of room for long-term rates to move from the trading we’ve seen in recent years.”
Looking at Bernanke’s other initiatives, he’s been buying treasury bonds and mortgage-backed securities.
Braive says a treasury bond-buying program of $40 billion a month was set to expire at the end of the month, and investors were afraid it wouldn’t be renewed. Upon Obama’s narrow victory, confidence that there’ll be another program in the New Year rose. People also expect the Fed will continue to support the bond market.
Braive says the mortgage program will extend through 2013 to support the housing market, with any additional stimulus measures only coming from Congress.
“The trading range seen for securities in the last few years will remain intact,” he says.
He’s not as confident about a major budget deal being reached by the end of the year, however.
Instead, he’s questioning the nature of the compromises will be between the Republic House, and the Democratic Senate and President regarding the fiscal cliff. And predicts some extension of current tax and spending cuts in the short-term.
They’ll then be a conference to determine what steps should be taken on the budget side to ensure recovery.
This creates some uncertainty in markets, and also impacts corporations who’ll be making some decisions about hiring and capital spending, says Braive.
“It could have the perverse effect of keeping the economy weaker than it would otherwise be,” he adds.
If a deal was reached, money would instead leave the bond markets and move into the equity market. Rates would also move higher.