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More Modest?

Fed officials on Aug. 10 said that a more modest recovery than anticipated is prompting them to retain a commitment to keep their benchmark interest rate close to zero for an extended period. The central bank also said it will maintain holdings of securities to prevent money from being drained out of the financial system it helped prop up after the credit seizure in 2008.

The central bank will purchase about $18 billion of U.S. Treasuries by the middle of September using money from principal payments on its holdings of agency debt and agency mortgage- backed securities.

"The Fed is pushing on a string,"said Peter Cecchini, chief strategist at BGC Financial LP in New York. "Because of the distortive effects of government policy, it's very hard to use the credit markets to read what's going on in the broader economy."

The search for higher returns will continue to buttress corporate bond prices, said Raphael Gallardo, who helps manage 500 billion euros of assets as the Paris-based chief economist at Axa Investment Managers.

"The global search for yield should continue to prevail and attract capital to credit markets, while the equity market is still viewed as too risky,"Gallardo said. The firm is overweight corporate bonds compared with government debt, he said.

While the Fed may be able to stave off recession, the economy is likely to slow once the central bank scales back support, said Scott Minerd, chief investment officer at Guggenheim Partners LLC, which oversees more than $100 billion in assets.

"The idea the Fed will be able to withdraw with perfect timing and it doesn?€?t cause the economy to slow is extremely remote," Minerd said. "The scale of the exercise is fraught with risk and is likely to lead to policy errors in its execution."

Peter Cecchini Comments: Debt Rally Cracking As Swaps Soar, Yield Spreads Flatline: Credit Markets - Bloomberg News Online

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