The end of the year is always a good time for reflection, and for thinking about what went well in our lives and what didn’t. From an investment perspective, one thing that fits in that latter category are investments in traditional bonds.
But the New Year also brings with it the time to make resolutions and changes. We believe that all investors should consider reviewing their bond portfolio to be sure it remains built to deliver their goals, whether those be income, principal protection or both.
We touched on this in BlackRock’s recently released list of five things to know and five things to do in 2014, and with our view that interest rates are likely to rise, we believe the risks embedded within certain parts of the market have increased. Thus, you should rethink how you’re invested. Let’s discuss the outlook first:
1. Modestly stronger growth should lead to slightly higher interest rates. But we do not expect a sharp or rapid acceleration. As the Federal Reserve begins to slow its extraordinary bond-buying program, we believe the 10-year Treasury yield will modestly climb around 0.5% by the end of 2014.
2. Low for Longer. It’s important to note that while the bond-buying program will be slowed, to avoid negative economic consequences of a sharp rise in rates, the Fed will likely promise to keep the fed funds rate low for some time.
3. Given the continued slow growth nature of the recovery, inflation, now at a four-year low in the United States, is likely to stay low at least through 2014.
The key point in #1 above is made nicely in this graphic below: