Tags: AllianceBernstein | Fed | rate | bond

AllianceBernstein: Rate Increases Not Necessarily Bad for Bonds

By    |   Thursday, 23 April 2015 08:20 AM

While some commentators are warning of a meltdown in the bond market once the Federal Reserve begins raising interest rates, two AllianceBernstein experts don't see it that way.

They are Ashish Shah, director of global credit and Ivan Rudolph-Shabinsky, a credit portfolio manager.

"Sometime this year, the Fed will probably raise interest rates for the first time [since 2006]. That makes bond investors nervous. But it shouldn’t. Those who keep their cool may find that higher rates can work to their advantage," they write in a commentary.

Many economists expect the central bank to move on rates in September. Bond prices fall when rates rise, of course.

"But as bonds mature, their prices drift back toward par. That means investors who sit tight will soon be able to reinvest the coupon income that their portfolios pay in newer — and higher-yielding — bonds," Shah and Rudolph-Shabinsky explain.

"This typically offsets any short-term losses and increases total return. For investors who rely on their bond portfolios to provide income over a long time period, the sooner rates rise, the better."

The 30-year Treasury yield hit a record low in January and the 10-year Treasury yield bottomed in 2011. Those yields are now about 2.65 percent and 1.97 percent respectively.

Meanwhile, high-yield bond funds have seen a huge inflow of cash since the 2008-09 financial crisis, as investors have searched desperately for yield in a time of historically low interest rates.

But that mass migration to junk could end in major trouble, says star investor Jeff Gundlach, CEO of DoubleLine Capital.

"The worry is that interest rates could start rising a few years from now, and when rates start to rise, the quest for yield will cool down, because that’s what’s driving a lot of investment activity," he told Wall Street Week.

"The risk is there could be a run on the bond funds, causing further downward price movement. A lot of investors don’t like Treasurys. They’ve been throwing caution to the wind."

To be sure, Gundlach thinks the Fed may wait until 2016 to raise rates, because the economy has "kind of sputtered out." GDP grew only 2.2 percent in the fourth quarter, and the Atlanta Fed's forecasting model puts growth at just 0.1 percent for the first quarter.

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While some commentators are warning of a meltdown in the bond market once the Federal Reserve begins raising interest rates, two AllianceBernstein experts don't see it that way.
AllianceBernstein, Fed, rate, bond
378
2015-20-23
Thursday, 23 April 2015 08:20 AM
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