Salient to Investors:

  • The last two Fed tightening cycles saw gains in debt securities from Treasuries to junk bonds: between June 2004 and June 2006 when the Fed raised rates to 5.25 percent from 1 percent, and in the 7 months ended January 2000 when rates rose 1.75 percent.
  • Paul Zemsky at Voya Investment Mgmt said the Fed has won the war on inflation, which has diminished over the past three decades, so it is unlikely the Fed will trigger any sharp selloff.
  • Kathy Jones at Charles Schwab said the Fed approach is much more transparent, which reduces uncertainty and risk.
  • There are fewer reasons for the Fed to raise rates as quickly this time because the US economy is expanding at a slower pace, there is less wage growth to pressure inflation, long-term bond yields offer a greater cushion against higher rates than in previous cycles – 30-yr Treasuries yield 1.61 percent more than 5-yr notes, versus the average 1.01 percent gap in the year before every tightening cycle since 1980 – and demand for fixed income from ballooning retirees.  Americans aged 65 or more will increase by 14.5 million this decade, the biggest increase versus the total population going back to 1900.
  • Ed Keon at Quantitative Management Associates said the tremendous demand for fixed income is not going to change anytime soon.
  • Priscilla Hancock at JPMorgan Asset Mgmt said it is a mistake to bet against the bond market because the road to higher rates will be long and slow and at a time when income is the most important thing.
  • The BIS said the global market for bonds has risen over 40 percent over the past 6 years to a record $100 trillion.
  • Futures contracts indicate a 60 percent chance the Fed will start raising rates by July 2015.
  • Economists say GDP will accelerate to 3 percent in 2015 when the Fed starts raising rates.
  • Guy Lebas at Janney Montgomery Scott said the actual event of a rate increase is far less important now.
  • Christopher Sullivan at United Nations Federal Credit Union said the risks inherent in bonds are higher because yields don’t have to rise much to redistribute significant losses to bondholders.
  • Economists predict the 10-year T-note rising to 3.63 percent by the end of 2015. Stephen Stanley at Pierpont Securities predicts 4.4 percent.

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