By Jonnelle Marte
Upbeat about stocks and the economy in general, investors were once again dumping U.S. Treasurys this morning — extending last week’s big sell-off. But are the recent moves the beginning of the end of the bond market’s long rally?
Last week, investors sold government bonds, pushing yields to their highest level since October (yields rise as prices fall). Yields on the 10-year Treasury hit 2.32% this morning, compared to 2.04% a week. Investors began to sell the bonds following the Federal Reserve’s mostly positive policy statement last week and its clean bill of health for most big banks. While most bond experts say the sell-off isn’t likely to accelerate, some predict investors will slowly abandon bonds in the coming weeks and months. “This is the start of a journey,” says David Kelly, chief market strategist for J.P. Morgan Funds.
In the near term, financial advisers say bond investors should brace themselves for losses as the drop in Treasury prices ripples over to high-quality corporate bonds, municipal bonds and mortgage bonds. High-yield bonds, which offer a substantive yield advantage over Treasurys, should hold up better than other types of bonds, says Kelly. And stocks may see some gains as bond investors shift some of their exposure to the market. Indeed, history shows that stocks tend to perform better as rates move up, says Sam Stovall, chief equity strategist for S&P Capital IQ.
To be sure, some experts predict the upward climb in bond yields to be short-lived. Anthony Valeri, fixed income strategist for LPL Financial, says it’s more likely that Treasury yields will trade in a range from 2.1% to 2.4% over the next several months as investors weigh a more confident Fed against threats stemming out of Europe and other economic reports, which may not be as bright down the road. And rising yields could in turn slow the economy by leading to higher mortgage rates, which would hurt an already weak housing market. “That tends to slow down the economy all else being equal,” says Valeri.
Either way, many advisers are recommending that investors start scaling back their fixed income holdings and increasing exposure to dividend-paying stocks in the U.S. and abroad, says Kelly. Within their bond portfolios, investors should stick to investment grade corporate bonds, high-yield bonds and mortgage bonds, which should have smaller losses than Treasurys. High-yield bonds may actually see gains while rates rise, says Kelly, if their yield advantage over Treasurys decreases.