Tapering was supposed to be bad for bonds.
But, with the Federal Reserve Bank tapering its bond-buying stimulus program down to $65 billion per month, bonds are actually up. Yields on the benchmark US Treasury 10-year bond is near its three-month lows, meaning the bond is near its three-month high.
Mary Ellen Stanek, Director of Asset Management at Robert W. Baird, manages $20 billion in institutional accounts. She believes part of the rally in bonds is a flight to safety from volatility in the stock market.
“Investors want to make sure that the fixed income they own – the bonds they own – will truly behave like fixed income into more volatility broadly speaking whether in the equity markets or the economy,” says Stanek. “There's been a fair amount of volatility and uncertainty in terms of the world's growth in various parts and various markets; there has been actually a rally in investment-grade fixed income.”
Stanek says shorter-term investors hoping to sit out a volatile stock market are now joining longer-term fixed income investors who require bonds for their portfolio due to cash flow or volatility considerations.
What data does Stanek use to give an indication of where rates are headed?
“Certainly, the job and employment data is very important because it gets right to the health and wellbeing of the US consumer,” says Stanek. “But for us, for the last several years, and it's still the most important ingredient in all of this, is wages and benefits. We believe that without any kind of inflationary pressures there, as long as wages stay low and contained without a lot of inflationary pressure, that interest rates will stay lower longer.”
To see the rest of Stanek’s discussion on interest rates over the past two months in light of the Fed’s taper, watch the video above.
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