Interest rates continue to be held down by “unnatural forces” – the policies of the Federal Reserve – with the bond market focusing closely on how those forces will be withdrawn over the next 12 to 24 months, according to Fran Rodilosso, fixed income portfolio manager for Market Vectors ETFs.
“Today’s price action post the employment report notwithstanding, at this point in the cycle, I believe equity markets are signalling increased optimism while bonds are reflecting still low inflationary expectations and a belief that the Fed will continue its easy monetary policy, even as it tapers its asset purchases,” says Rodilosso. “In my view, if you are an optimist on the US economy, you should be a little concerned about Treasury yields at 2.72 per cent on the 10-year yield.”
Rodilosso (pictured) notes that investors who were bold enough to extend duration at the beginning of 2014 have done quite well through the first quarter, so that for the moment higher rates are not just a one-way trade. That, however, is unlikely to persist in his view.
“A ‘normalisation’ of rates over the next one to two years may not be as dramatic as what we saw trough to peak in 2013, and the shorter end of the yield curve may be the more vulnerable spot now, but I believe there is still ample scope for the entire yield curve to shift upward,” the Market Vectors portfolio manager says. “Investors should continue to keep this in mind as they decide how they want to position their fixed income portfolios.”
