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By Miriam Sjoblom, CFA | 06-13-2013 12:00 PM

A Dress Rehearsal for the End of QE3?

MetWest's Tad Rivelle says recent swings in the fixed-income market are representative of conditions when QE3 ends, and he is eyeing asset classes with low Treasury correlations.

Miriam Sjoblom: Hi, I’m Miriam Sjoblom, associate director of fund research at Morningstar, and I am here at the 2013 Morningstar Investment Conference with Tad Rivelle, who's the CIO of fixed income at TCW.

Thank you for joining us, Tad.

Tad Rivelle: Thank you.

Sjoblom: Tad, to start off, it's been a turbulent several weeks for fixed-income investors, and it will be great if you could put some context around that for us.

Rivelle: Well, I think, largely what we saw was a backing out of probably accessibly optimistic views that had been expressed in the fixed-income market. These views essentially pertain to the belief about how long the Fed would likely leave the quantitative easing in place and how much longer it would continue zero rates. Well, remember that late last year, we heard statements coming out of prominent Fed officials, Janet Yellen, being among them to the effect that QE is a fixture or is going to be fixture of Fed thinking for many years to come, until we see unemployment perhaps below 6.5%. Some thought by using that metric that we could perhaps see a continuation of the financially repressed environment until 2017.

So, to a certain degree, I think, that the volatility that we've seen is really just the market in a sense waking up from a slumber that it was put under late last year and is now perhaps a little bit more fairly valued in light of statements that came from Fed chairman Ben Bernanke and other Fed officials. [These statements are] to the effect that indeed Fed policy is not necessarily contemplating many, many years into the future with respect to a potential tapering of QE, but rather that a tapering of QE is something that, while not immediate and while not necessarily even a 2013 event, would none the less happen sooner than the market expected. And I think that's why you saw rates go up as much as they did. So, call it the dress rehearsal for the end of QE, that's what May, and June so far, I think have represented.

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