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BlackRock Warns Bonds Will 'Struggle' as Fed Hikes Rates

BlackRock Warns Bonds Will 'Struggle' as Fed Hikes Rates
(Dollar Photo Club)

Tuesday, 05 January 2016 08:49 AM

BlackRock Inc., the world’s largest asset manager, says bonds will “struggle” in 2016 as the Federal Reserve raises interest rates.

Two regional Fed bank presidents, Loretta Mester of Cleveland and John Williams of San Francisco, dismissed concerns over stumbling stocks on the first trading day of the year and said the U.S. economy’s growth was on solid ground. Futures contracts indicate investors are sticking to their bets for the central bank to increase its benchmark in 2016, even after Chinese stocks led shares down around the world Monday.

“We also expect bonds to continue to struggle as interest rates drift higher on the back of Federal Reserve tightening and some stabilization in inflation expectations,” Russ Koesterich, global chief investment strategist for New York-based BlackRock, wrote in a report Monday. The company has $4.5 trillion in assets.

The 10-year U.S. note yield was little changed at 2.25 percent as of 7:30 a.m. in London, according to Bloomberg Bond Trader data. The price of the 2.25 percent note due in November 2025 was 100. The yield will climb to about 2.75 percent by year-end, Koesterich said.

Treasurys returned 0.9 percent in 2015, while a gauge of global developed sovereign debt lost 2.5 percent, according to Bloomberg World Bond Indexes.

China Shares

Trading in China’s CSI 300 Index of shares was halted Monday after the gauge slumped 7 percent, and investors pushed equity prices down around the world. The gauge rose 0.3 percent Tuesday.

“Underlying fundamentals of the U.S. economy remain very sound,” the Fed’s Mester said Monday in an interview on Bloomberg Television. “There’s going to be volatility in the markets. That’s kind of the nature of financial markets,” said Mester, who votes on monetary policy this year.

Williams, who doesn’t vote until 2018, also downplayed market turmoil, saying he expected unemployment to fall below the current level of 5 percent and inflation to begin moving back toward the Fed’s 2 percent target this year.

“We are, relative to most other countries, in very good shape, partly because we took very aggressive monetary policy actions, and other actions, to get our economy back on track,” Williams said in an interview on CNBC.

‘Tough Year’

Treasury two-year yields will rise as the Fed pushes rates higher, said Kim Youngsung, head of overseas investment at South Korea’s Government Employees Pension Service in Seoul, which oversees the equivalent of $12.6 billion.

“It’s going to be a tough year for short-term interest rates,” he said. “But long-term yields will be OK. There’s heavy demand for long-term yields. We have uncertainty about the stock market. We just had a Chinese shock. That limited the increase in long-term interest rates.”

The extra yield on 30-year bonds over two-year notes shrank to 188 basis points on Dec. 29, the narrowest since March. The difference was 194 basis points Tuesday.

There’s a 92 percent probability the Fed will raise rates at least once in 2016, after making its first increase in December in almost a decade, according to futures contracts. The odds were 93 percent on Dec. 31.

Policy makers will raise their benchmark in four quarter-point steps in 2016, according to projections the central bank issued last month. They raised rates in December for the first time in almost a decade.

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BlackRock Inc., the world's largest asset manager, says bonds will "struggle" in 2016 as the Federal Reserve raises interest rates.
blackrock, bonds, treasurys, invest
Tuesday, 05 January 2016 08:49 AM
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