Tags: Fed | bond | Treasurys | taper

Analysts Predict Bond Market 'Hell' Next Year

Monday, 02 Dec 2013 10:48 AM

By Michael Kling

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Next year may see more bond market turbulence.

In fact, some analysts are using much stronger words to forecast bond markets in 2014.

"I reckon we're going to have hell in the bond markets next year," Bill Blain, senior fixed income broker at Mint Partners, told CNBC.

Editor’s Note:
Obama Donor Banned This Message (Shocking)

After remaining near rock-bottom levels while the Federal Reserve remained committed to quantitative easing, interest rates for the 10-year Treasury spiked when Fed officials talked about tapering the stimulus this year.

Rates then dropped when the Fed surprised markets in September when it didn't taper. For the time being at least, the Fed is continuing to purchase $85 billion of Treasury and mortgage bonds per month. But when it does scale back its purchases, or even announces plans to taper, yields are likely to spike across the range of fixed-income assets. Bond investors will suffer as bond prices drop.

"I think there is potential for a massive sell-off in the U.S. once we see the taper finally start, and that's not because people are not prepared, it's because that is what happens when you stop distorting markets," Blain noted, advising investors to buy bonds now but sell them as soon as they look "weak."

"It's a dangerous game trying to time your exit," Johan Jooste, head of the London investment office at private banking group Julius Baer, told CNBC. "The level of yields and the direction of yields both argue against really having strong fixed income exposure."

Some experts recommend sovereign bonds of southern European nations, saying their yields are markedly higher than those of U.S. Treasurys and stability has returned to the eurozone.

But Blain, warning that the euro crisis may return, says bonds of peripheral eurozone countries are also risky.

"They are not sovereign bonds anymore, they are bonds issued by a sovereign entities linked to a currency they don't control," he told CNBC.

Others say the Fed will remain committed to low rates through 2014. Janet Yellen, nominated as the new Fed chairman, will probably stress low rates in an effort to reduce unemployment, which remains high, experts say, according to Reuters. In addition, even if the Fed tapers, it will still keep short-term rates near zero.

"The economy is too weak for the Fed to consider a pullback in quantitative easing, let alone an abandonment of zero percent interest rates," Jeffrey Rosenberg, BlackRock chief investment strategist for fixed income, told Reuters.

Editor’s Note: Obama Donor Banned This Message (Shocking)

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