Tags: Crofton | Fed | bond | yield

Philly Trust's Crofton: Interest Rates Will Increase Quickly

Wednesday, 31 Jul 2013 10:20 AM

By Michael Kling

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Interest rates will rise quickly as 10-year Treasury yields reach 5 to 6 percent in the next 18 to 24 months, according to Mike Crofton, president and CEO of the Philadelphia Trust Co.

The Federal Reserve, Crofton told CNBC, will lose control over long-term interest rates as investors move their assets from bonds to stocks in what observers call "the Great Rotation."

"It is our opinion that interest rates have begun their assent, that the Fed will eventually lose control of interest rates," Crofton told CNBC. "The yield curve will first steepen and then will shift, moving rates significantly higher.

Editor's Note:
Billionaires Dump Stocks. Prepare for the Unthinkable.

"If the great rotation that everybody talks about out of bonds into stocks does happen, and that gains its own momentum, you will see rates begin to back up very quickly. The Fed will not be able to control it."

Treasury yields will quickly pass 3.5 percent, then pass 5 percent sometime between 18 and 24 months, Crofton predicted.

In a snowball effect, an increase in bond yields, which causes bond values to drop, will prompt investors to sell bonds that would cause values to drop even more.

Corporate bonds are in a position handle rising rates, he told CNBC.

"I don't think you're going to see a lot of defaults in the corporate sector because corporations have been very smart at this time of the cycle. They have refinanced everything they possibly can, at the lowest rates they can possibly achieve."

How quickly bond yields increase will depend largely on when and how quickly the Fed winds down its monthly bond purchases. While the Fed has said it may start tapering its stimulus later this year if the economy improves, some economists predict the economy will not improve as fast as the Fed expects, prompting it to delay tapering plans.

U.S. gross domestic product (GDP) growth may fall within of 2.2 to 2.8 percent for the next couple of years, Kevin Mahn, chief investment officer of Hennion & Walsh Asset Management, wrote in an article for Forbes. Others say slow growth may last even longer.

"Should these GDP forecasts come to fruition, we may see the Fed maintaining their accommodative stance for longer than many market participants are now anticipating," he wrote

Editor's Note: Billionaires Dump Stocks. Prepare for the Unthinkable.

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