By NELSON D. SCHWARTZ
Published: March 18, 2012
Investors will be closely watching for another rise in interest rates when trading resumes on Monday, after the bond market’s sharpest move in nearly six months caught some traders by surprise last week.
Joshua Roberts/Bloomberg News
Ben S. Bernanke, the chairman of the Federal Reserve.
Despite the sudden swing higher, most Wall Street strategists are playing down the danger of a surge in interest rates, which have been historically low because of demand for bonds from both the Federal Reserve and private investors wary of all but the safest assets.
The sell-off last week was caused by increasing signs that the economy might finally be gaining steam, lifting the yield on 10-year Treasury bonds to 2.31 percent on Friday, from 2.04 percent a week earlier. That was the biggest move in bond yields, which move inversely to bond prices, since October, when rates briefly topped 2.4 percent.
“It clearly caught everyone’s attention,” said Jim McDonald, chief investment strategist for Northern Trust in Chicago. “When something moves like this, by definition it’s a surprise.”
More data confirming that the economy is gaining momentum could come later this week. In addition to data expected on Tuesday and Wednesday on housing starts and existing home sales, the Commerce Department will disclose the latest figures for sales of new homes on Friday. And on Thursday, the Conference Board will announce its index of leading economic indicators for February.
After meeting last Tuesday, the Federal Reserve acknowledged the slight upturn in economic conditions but reiterated its intention to keep short-term rates near zero through late 2014. That was despite an earlier warning from one regional Fed president, Jeffrey M. Lacker of Richmond, that rates might have to be raised sooner than that to head off any risk of inflation.
While rising bond yields can undermine prices for stocks and indeed signal the threat of inflation, Mr. McDonald said he did not think they were a threat right now. Instead, he said, the uptick in rates represents a “normalization” for bond yields, which are near historic lows.
“At worst, it’s a very mild yellow signal,” he said. “It’s far from a flashing red.”
And although everything from car loans to mortgages to credit card rates are keyed off of bond yields, and go up when yields rise, Mr. McDonald said he did not think consumers should be too concerned, at least for now.
“There’s a much bigger risk from rising gas prices than rates,” he said. “That’s a very visible consumption tax.”
Strategists, money managers and other experts said last week’s move in rates was spurred by the Federal Reserve’s statement about improving economic trends, as well as the largely upbeat results also announced on Tuesday from the stress tests performed by the Fed on 19 large banks. Regulators will now permit a host of banks to raise dividends and buy back stock, another sign of the financial sector’s recovery since the financial crisis.
At the same time, the recent move by bond investors to largely accept a steep write-down in the face value of Greek debt, along with support for local financial institutions from the European Central Bank, has helped ease concerns, for now, about the Continent’s sovereign debt problems. When fears were surging about Europe late last year and earlier this year, many investors sought out United States Treasury bonds as a rare haven.
“The message is that maybe things aren’t as bad as people thought,” said Carl Kaufman, a portfolio manager in San Francisco with Osterweis Capital, which has $5 billion under management. “You can’t have it both ways with healthy banks, a stronger economy, and still have a zero interest rate policy.”
Bonds typically sell off during periods of stronger economic growth, when inflation is more of a threat, and in better economic conditions investors also favor riskier assets like stocks, as opposed to safer, fixed-income holdings.
In fact, the Standard & Poor’s 500-stock index gained 2.4 percent last week and now stands at its highest level since May 2008, before the collapse of Lehman Brothers and the onset of the financial crisis.
David Kelly, chief market strategist for J. P. Morgan Funds, said he thought the upward tick in rates might encourage some corporate borrowers and home buyers to act now, before rates moved higher.
“It doesn’t take a rocket scientist to figure out rates wouldn’t stay in this range,” he said.
Despite last week’s run-up, though, rates remain very low by historical standards.
Between 1990 and today, the typical yield on the 10-year bond averaged 5.25 percent, and even for the last five years, the average, 3.38 percent, was significantly higher than it is now, according to Ira Jersey, United States interest rate strategist at Credit Suisse. At about this time last year, he noted, the 10-year bond yield was 3.4 percent.
“This happened a little sooner than we expected,” he said. “We thought it was going to be a second-half-of-the-year event.”
Nonetheless, Mr. Jersey said he expected rates to stay between 2.10 and 2.42 percent, rather than embark on a swift move higher. “We don’t expect this to be a long-term trend that will take us back to a yield of 3.4 or 4 percent,” he said.
He added that if rates were to keep moving higher, the Fed would most likely step in with another round of “quantitative easing,” buying up bonds to force rates lower. In particular, the Fed wants mortgage rates to remain low in an effort to help the housing market heal. Mortgage rates have increased slightly in recent days, but remain below 4 percent.
“If you got back to 4.4 percent or 4.5 percent, the Fed would get nervous,” Mr. Jersey said.
No comments:
Post a Comment