September 3 2014
There is no substitute for mental preparedness. Just ask any professional athlete or Navy SEAL. One essential aspect of metal preparation is situational awareness – being able to identify, process, and understand what is happening around you at any given time.
That’s been a challenge for bond investors this year. 2014’s Treasury market rally took economists (and everyone else) by surprise:
“Treasury yields lurched higher in May 2013, when the Fed first sketched out a timetable to wind down its bond-buying program, even though it didn’t actually begin the winding down until seven months later. Yields were expected to keep rising this year as that program ended and the Fed turned its attention to raising its short-term policy rate but, instead, yields have fallen as investors still seem enamored of bonds.”
A Bloomberg survey (August 8-13) found economists’ median forecast projected 10-year Treasury yields would be 2.7 percent by the end of September. The yield on 10-year U.S. Treasuries finished last week at 2.34 percent.
It’s likely bond market surprises may continue during the next few months. In fact, bond investors may want to mentally prepare themselves for a rough and bumpy ride. It’s likely analysts and investors will try to anticipate the Federal Reserve plans for increasing interest rates, and it’s not all that hard to imagine the type of volatility that could ensue. All you have to do is think back to the ups and downs that punctuated guesses about when the Fed might begin to end its bond-buying program.
Barron’s offered the opinion the first rate hike won’t happen until March of 2015, but that won’t stop anyone from speculating it could happen earlier. Conjecture, rumor, and supposition are likely to begin before the Federal Open Market Committee meeting on September 16, 2014.
No matter how markets twist during the next few months, investors should keep their wits about them. Being mentally prepared may help.
- Data as of 8/29/141- WeekY-T-D1-Year3-Year5-Year10-Year
- Standard & Poor’s 500 (Domestic Stocks)0.0080.0840.2230.1830.1440.062
- 10-year Treasury Note (Yield Only)2.3N/A188.8.131.52.2
- Gold (per ounce)0.77-8.7-116.112.2
- DJ-UBS Commodity Index0.90.7-3.8-7.80.1-1.2
- DJ Equity All REIT TR Index0.4184.108.40.2068.79.2