Talking Numbers - CNBC | Yahoo Finance

Sponsored by
Talking Numbers

Brace for higher rates: Strategists

Talking Numbers

Bill Gross says the Fed will keep short-term rates low for years to come. But, could a QE taper mean a steepening yield curve and thus higher long-term rates?

Bondholders may be having a tough fall and winter as the US Treasury 10-Year bond's prices fall, but Pimco’s Bill Gross isn't too stressed. Well, not when it comes to short-term bonds, at least.

The co-founder of the world's largest bond fund thinks the Federal Reserve Bank will keep short-term rates low well into 2016, if not beyond.

Gross needs to be right, if just for the sake of his fund. Pimco's Total Return fund has had seven straight months of outflows with a total of nearly $37 billion leaving the fund in 2013. November's outflows of $3.7 billion now leave the fund at $244 billion assets under management.

In his most recent note to investors, Gross says:

“Our primary thrust has been to focus on what we are most (although not totally) confident about, that the Fed will hold policy rates stable until 2016 or beyond. While this and its conjoined policy of QE may have only redistributed wealth as opposed to creating it (picking savers’ pockets while recapitalizing banks and the wealthiest 1% of our population), it is a policy that a Janet Yellen Fed seems determined to pursue. The taper will lead to the elimination of QE at some point in 2014, but the 25 basis point policy rate will continue until 6.5% unemployment and 2.0% inflation at a minimum have been achieved.”

One of the main tools of the Fed is the overnight lending rate it targets for banks to charge one another, known as the federal funds rate. Since the financial crisis in 2008, the Fed has kept that rate down to a range of between 0% and 0.25%. It was 5.25% the year before the crisis.

(Read more: Fed's Williams: Cutting rate on banks' reserves 'would make sense')

As well, another action the Fed took to keep rates low was to buy US Treasury and mortgage bonds. Known as “quantitative easing” (“QE”), it is meant to add dollars into the financial system and lower rates since higher bond prices means lower bond yields. The Fed has been conducting QE for half a decade, upping the amount to $85 billion each month starting a year ago.

Thus, Gross is saying the Fed might taper QE down to zero in 2014 – which could lead to higher long-term rates – but it will still leave the shorter-term fed funds rate unchanged it achieves its targeted unemployment and inflation rates. That could take a couple of years at least, according to Gross.

“I would agree with him that the Fed is definitely going to keep the short end of the [yield] curve low,” says CNBC contributor Gina Sanchez, founder of Chantico Global. “The question is will the market will play along; what does that do for the rest of the curve? And what we’ve seen so far is the 10-year and 30-year [yields] creeping up while the 2- and 5-year segment of the curve has actually been falling a little, tightening ever so slightly. What that tells you is the market believes what Bill Gross says – that the short end is definitely going to stay low but the long end has been creeping up.”

(See: The Federal Reserve: CNBC Explains)

Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson, believes rates on the US Treasury 10-year bonds are headed up, albeit slowly as well.

“While I’m not going to predict a huge spike in interest rates – I don’t expect them to soar – I think we’re seeing the strongest evidence in years that the primary trend in rates could be higher,” says Ross.

To see the rest of Sanchez’s fundamental analysis and Ross’ technical analysis on where rates are headed next, watch the video above.

More from Talking Numbers:

Four big reasons to stay away from gold: Strategists
Tesla is headed to $160 at a minimum: Strategist
McDonald’s has bigger problems than $15/hour wages


Follow us on Twitter: @CNBCNumbers
Like us on Facebook:


View Comments (30)

Recommended for You

  • Inflation is about to fall-and fall hard: Insana

    I would bet inflationistas a truckload of scarce limes that inflation pressures are temporary and inflation is about to fall, says Ron Insana.

  • Agents get subsidized 'Obamacare' using fake IDs

    WASHINGTON (AP) — Undercover investigators using fake identities were able to secure taxpayer-subsidized health insurance under President Barack Obama's health care law, congressional investigators said Wednesday.

    Associated Press
  • Best marijuana stocks to buy now

    Marijuana is going to be huge growth industry with lots of profits to be made, but that doesn't mean you buy a hyped up weed-related penny stock.

  • Play

    How to Build Your Own Annuity

    Instead of paying an insurance company, financial advisor Allan Roth recommends building your own "indexed annuity" that protects principal while giving market upside.

    WSJ Live
  • World Bank lauds India PM, offers billions in aid

    The World Bank on Wednesday offered India up to $18 billion in financial support over the next three years while lavishly praising new right-wing Prime Minister Narendra Modi's "ambitious vision" for the country. Modi's Hindu nationalist Bharatiya Janata Party was elected in May with the biggest…

  • Despite sanctions call, UK approves arms to Russia

    LONDON (AP) — Britain is still authorizing the export of arms and military equipment to Russia despite the government's call for tough sanctions over Moscow's arming of separatist rebels in Ukraine, a group of lawmakers said in a report Wednesday.

    Associated Press
  • Apple Hints New Products Near With Bigger IPhones Looming

    Apple Inc. (AAPL) signaled that the long wait for new products is nearing an end. With bigger-screen handsets in development, Apple said yesterday that shoppers are delaying buying new iPhones, which will weigh on sales in the current quarter ending in September. Yet rather than dissuade buyers…

  • CEO: Rivers to quit Clippers if Sterling stays

    LOS ANGELES (AP) — The interim CEO of the Los Angeles Clippers testified Tuesday that coach Doc Rivers told him he will quit if Donald Sterling remains the owner of the team.

    Associated Press
  • What a Marijuana ETF Would Look Like

    The changes taking place around marijuana for medical use and for recreational use are the biggest in almost everyone’s lifetime. There are quite literally billions of dollars up for grabs for those who ...

    24/7 Wall St.
  • China's rich pimp their planes as jet market takes off

    Shanghai (AFP) - When a Chinese customer asked for the interior of his new Bombardier Challenger 850 jet to be covered with pricey black carbon fibre, the designer was shocked -- but happy to oblige.

  • U.S. housing turning the corner, inflation creeping up

    By Lucia Mutikani WASHINGTON (Reuters) - U.S. home resales hit an eight month-high in June, suggesting the housing market was gradually regaining momentum and would help the economy to stay on a higher growth path this year. The third straight month of home sales gains, reported by the National…

  • A Boston Hedge Fund Made $950 Million On One Stock Today

    Shares of Puma Biotechnology (PBYI) were going...

    Business Insider
  • Detroit retirees back pension cuts by a landslide

    DETROIT (AP) — A year after filing for bankruptcy, Detroit is building momentum to get out, especially after workers and retirees voted in favor of major pension changes just a few weeks before a judge holds a crucial trial that could end the largest public filing in U.S. history.

    Associated Press
  • Play

    Chris Davis: The Key to Long-Term Investing

    Davis has beaten the index by looking at cash flow, not daily price changes. Plus: Why more than half of all mutual fund managers don't deserve your money.

    WSJ Live
  • China food scandal spreads, drags in Starbucks, Burger King and McNuggets in Japan

    By Adam Jourdan SHANGHAI (Reuters) - The latest food scandal in China is spreading fast, dragging in U.S. coffee chain Starbucks, Burger King Worldwide Inc and others, as well as McDonald's products as far away as Japan. McDonald's Corp and KFC's parent Yum Brands Inc apologized to Chinese…

  • 6 Money Lessons You Should Have Learned Before College

    In a matter of weeks, the class of 2018 will be...

    Business Insider
  • JetBlue pilot among 6 arrested in Boston drug bust

    BOSTON (AP) — A JetBlue pilot from Florida is among six people arrested by Boston police over the weekend in an investigation of drug dealing incidents near the Boston Common.

    Associated Press
  • Airlines ban flights to Israel after rocket strike

    JERUSALEM (AP) — A Hamas rocket exploded Tuesday near Israel's main airport, prompting a ban on flights from the U.S. and many from Europe and Canada as aviation authorities responded to the shock of seeing a civilian jetliner shot down over Ukraine.

    Associated Press
  • Harley Davidson sputtering, Comcast loses more subs, Herbalife thwarts Ackman

    Today's trending tickers highlights moves in Harley Davidson, Comcast, and Herbalife

    Yahoo Finance
  • Broadcom cuts 2,500 jobs in wind-down of baseband unit

    Broadcom Corp said on Tuesday it is winding down its money-losing cellular baseband chip business and cutting one-fifth of its total workforce, instead of selling the unit. Chief Executive Scott McGregor told analysts on a conference call that after Broadcom said in early June it would exit…