Tags: bond | ETF | rates | prices

WSJ: Rising Rates Set to Deliver More Pain for Bonds

By Michelle Smith   |   Friday, 06 Sep 2013 08:00 AM

Many investors are standing on the sidelines waiting for bond prices to fall further, while fixed-income investors scramble for the exits as their pain looks set to continue.

This could the worst year for fixed income investors since 1994, when the Federal Reserve rolled out a surprising rate hike, according to The Wall Street Journal.

Data from Lipper show $57.3 billion exited U.S.-listed taxable mutual funds and exchange-traded funds (ETFs) in just the past three months. That's the fast pace of outflows seen in nine years, The Journal noted.

Editor’s Note:
Obama Donor Banned This Message (Shocking)

Bond prices and yields move in opposite directions. At one point last summer, yields on 10-year Treasury notes fell below 1.5 percent. In comparison, last week rates climbed above 2.9 percent.

Rates have been moved higher since May, driven by speculation that the Fed is going to taper its quantitative easing (QE).

"As the economy continues to recover from the Great Recession and the lingering impacts of the European sovereign debt crisis subside, it comes as no surprise to see rates on the rise," David Mazza, head of ETF investment strategy at State Street Global Advisors, told USA Today.

"What seems to have caught investors by surprise however, is the speed at which rates moved after Fed Chairman Ben Bernanke suggested that QE may be tapered off sooner than consensus expected," he added.

Many market participants are looking for yields to continue on the upward trajectory. When the prices fall to attractive levels enough levels, some say they will jump into the market.

"We would look at the 10-year cresting into 3 percent as a starting point to put some money to work again," Richard Sega, chief investment officer at Conning Asset Management, told The Journal.

"We're getting close to being interested in buying Treasuries again,” James Camp, managing director of fixed income at Eagle Asset Management, told The Journal, adding that his firm is waiting for the yield to reach 3.1 percent.

Analysts at JPMorgan Chase predict that by the end of year 10-year Treasuries will see a yield of 3.15 percent.

If that happens, it will represent an additional loss of about 3.6 percent in the value of the notes. That comes on top of the 6.8 percent loss already seen through August, The Journal explained.

Many of the investors with money in bonds and fixed-income funds sought safety in these products during the financial crisis, under the assumption that they were purchasing risk-free assets.

An Edward Jones survey reported that 63 percent of Americans don't realize the negative effects rising interest rates can have on their portfolio, USA Today reported.

The realization, and the shock, is likely to come when those investors receive their statements for the third quarter.

Editor’s Note: Obama Donor Banned This Message (Shocking)

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