The economy and the markets have been gaining ground, aided by a slew of governmental policies. The lax monetary policy won’t last forever and a rising interest rates will deal a blow to the bond market, but will it also deal a blow to stocks and exchange traded funds (ETFs)?
Strategists and analysts believe that policymakers will begin to incrementally raise rates in about six months, and they predict that the result will be volatility in both stocks and bonds, reports Gail MarksJarvis for The Chicago Tribune. [Bond ETFs Facing A Wave of Issues.]
Bond investors who are holding bonds at low rates may lose money if interest rates rise because low-interest bonds won’t be an easy sell unless the bond holder is willing to accept a lower price. Since both Treasurys and municipal bonds are paying little interest, increases in rates could have some bond investors seeing a few quarters of negative returns, says Neuberger Berman fixed-income chief investment officer Brad Tank.
Still, if interest rates increases too high too fast, equities and stocks may feel the pressure since companies face higher interest on loans, which would eat away at profits. [What ETF Investors Want Now.]
Some economists think that the Fed won’t raise rates until unemployment eases a little and till inflation actually starts to increase. Merrill Lynch strategist David Bianco stated that “highly elevated and persistent inflation requires a wage-price spiral to sustain itself,” and unemployment will likely stay high through 2011. Bianco also notes that government deficits and eventual inflation can increase inflation expectations, which may push bond interest rates higher. [Bond ETF Alternatives.]