Stocks and corporate bonds may be the surprise big losers once the Federal Reserve starts reducing its $4.5 trillion balance sheet.
A committee of investors and banks highlighted that outside risk in a presentation to Treasury Department officials this month. A week after that, strategists at Morgan Stanley separately warned that investors are underestimating the trouble that the Fed’s plans could bring to corporate debt markets.
Money managers don’t seem alarmed so far. Stocks have gained 10 percent this year, including dividends, while corporate bonds are up 4.8 percent as of Friday’s close. Both Treasury debt and mortgage bonds, the securities most directly influenced by the Fed’s plans to reinvest less money, have lagged the broader U.S. bond market in 2017, although their returns tend to be more stable.
The threat to the stock and corporate bond markets underscores the bind that the Fed is in as it tries to