Harvard manager sees Fed policy shift

NEW YORK (Reuters) - The U.S. fixed income market will become attractive to investors as the Federal Reserve shifts course in the face of a weaker housing market, Harvard University's top investment manager said on Monday.

Speaking via teleconference from Boston, Mohamed El-Erian said the market may be too focused on the idea that the central bank will keep pushing rates higher.

"The housing market is starting to weaken, and that's been a major enabler of economic growth," said El-Erian, chief executive officer of Harvard Management Co., which invests about $26 billion for Harvard University.

"People have been using their houses as ATMs (automated teller machines)," he told the Reuters Hedge Funds and Private Equity Summit in New York. "That stimulus of aggregate supply is declining (and) a major opportunity down the road will be in the U.S. fixed income market."

Rising mortgage interest rates have trimmed U.S. home sales in the past six months, and median home prices are starting to soften while inventories rise.

On Monday the pending home sales index for March was lower for the fifth time in six months, according to the National Association of Realtors.

The Federal Reserve raised short-term interest rates last week for a 15th consecutive meeting, to 4.75 percent.

Financial markets expect another rate hike in May, and prospects for a July increase FFN6 have jumped in the past week to about 38 percent.

At the same time, traders have largely abandoned ideas that the Fed will start trimming rates by late 2006 or early 2007.