The US Federal Reserve has indicated several times that it will continue its current “Accommodative” policy stance at least until late 2014. This signifies that the Federal Reserve will continue to keep interest rates where they are now for at least two more years.
Based on recent movements in Treasury yields, markets are clearly experiencing a much improved and far more sustainable economic recovery, particularly in the US. We believe that this policy stance may be challenged earlier if markets continue to see positive growth.
We are of course aware of the many issues that still lie ahead, predominantly in Europe. As such, if the recent sell-off in Treasuries is any indication, we could be seeing a trend toward higher yields and lower long- term bond prices in the months and years ahead, barring any unexpected downturn especially in the US. Like any asset price movement, the move will not be a straight-line and could be gradual over the next couple of years.
We have stayed away from any fixed long-term bonds for some time while focusing on those that are usually no more than five years in duration and that are floating-rate in nature.
It will be important to keep up with the movements in Treasuries and long-term government bonds as that will have longer term implications on stock market movements and valuations around the world. As many important growing regions such as China and Hong Kong are largely pegged to the US dollar, the implications are further and wider than what most investors would expect.
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