Tags: Bonds | Treasurys | Dime | Steamroller

Money Manager Young: Holding Bonds Is 'Like Picking Up Dime in Front of Steamroller'

Friday, 22 Aug 2014 11:23 PM

By Dan Weil


The 10-year Treasury yield recently may have dropped to a 14-month low of 2.3 percent, but when interest rates finally move up, bond investors could get slammed, says George Young, co-manager of the Villere Balance Fund.

Treasury yields hit their lows amid concern about geopolitical turmoil. The 10-year yield stood at 2.40 percent late Friday.

"It's not much of a move before interest rates move upward and that means something like a 2.4 percent yield on the 10-year government bond moves to 2.75 percent," Young told CNBC.

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"You lose 3 percent of your money just like that. It's like picking up a dime in front of a steamroller. That's a scary thought."

One factor that could push yields higher is if the Federal Reserve decides to raise interest rates sooner than expected.

The market consensus has been that the Fed will move in the second or third quarter of next year. But the hawks among Fed policymakers have indicated they will like to see rate hikes sooner than that.

Some bond market participants turned more bearish after Fed Chair Janet Yellen's speech Friday.

"Everyone was a Treasury bull headed into Yellen, suggesting the market was expecting her to remain dovish and to temper the hawkishness out of the Fed minutes," Aaron Kohli, an interest-rate strategist BNP Paribas, told Bloomberg.

"In reality, Yellen was much more balanced than the market was expecting, which is causing some weakness in the market."

But some investors in other areas of the bond market don't feel as vulnerable, feeling more protected from liquidity concerns. Buyers of high-quality bonds continue to outnumber sellers.

"Where we operate, it's very healthy," says Rob Galusza, who runs Fidelity's Limited Term Bond fund (FJRLX), which invests in shorter-term corporate bonds and Treasurys. "People feel like they can withstand the volatility there," he told the Associated Press.

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