Tags: Davis | Fed | rates | September

Bond King Davis: Fed Will Likely Raise Rates in September or December

By    |   Friday, 15 May 2015 06:00 AM

With the Vanguard Total Bond Market Index Fund now the world's biggest mutual fund in the fixed-income space, its manager Greg Davis reigns as the new king of the bond market.

So what does his royal highness think of the economy and Federal Reserve policy?

Economic growth is "relatively muted," he told CNBC. GDP expanded just 0.2 percent in the first quarter, and the Atlanta Fed's forecasting model puts second-quarter growth at only 0.7 percent.

"One in nine Americans are still underemployed. You don't see a ton of strength in the labor market," Davis said. The unemployment rate totaled 5.4 percent in April. Meanwhile, inflation remains low, he notes. Consumer prices slid 0.1 percent in the 12 months through March.

Davis sees growth of about 2.5 percent for the year as a whole. And what does that mean for the Fed?

"Our best estimate is for them to start the rate hike cycle sometime in September or December," he said, matching the forecast of many other experts.

Davis expects the 10-year Treasury yield "to stay anchored below 2.5 percent or so," as investors seek a safe haven. The yield stood at 2.25 percent at midday Thursday.

Treasurys have hit the skids lately, with the 10-year yield reaching a six-month high of 2.37 percent Tuesday as the bond selloff in Europe has spilled over to the United States.

But fear not fixed-income investors. With U.S. economic growth remaining sluggish and the Federal Reserve highly unlikely to raise interest rates until at least September, the bond market still has plenty of support.

"The data in the U.S. does not support this move higher in yields, so if we get a spike higher in yields it may not be sustainable," Jim Caron, a bond portfolio manager at Morgan Stanley Investment Management, told The Wall Street Journal.

"There have been a lot of false starts" for the U.S. economy," he noted. For example, GDP surged 5 percent in the third quarter before decelerating to growth of 2.2 percent in the fourth quarter.

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With the Vanguard Total Bond Market Index Fund now the world's biggest mutual fund in the fixed-income space, its manager Greg Davis reigns as the new king of the bond market. He estimates the Federal Reserve will hike interest rates this year.
Davis, Fed, rates, September
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2015-00-15
Friday, 15 May 2015 06:00 AM
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