Bond investors should prepare for string of rate hikes in 2018

But fund managers see no reason to panic, unless inflation suddenly takes off

Nov 22, 2017 @ 12:31 pm

By Jeff Benjamin

Yield-starved investors likely will have more to nibble on now through 2018, as the Federal Reserve is widely expected to introduce between four and five interest-rate hikes over the next 13 months.

While the bond markets have been treading through uncharted territory ever since the emergency-reactions to the 2008 financial crisis pushed interest rates to the floor, and piled nearly $5 trillion on the Fed balance sheet, bond experts generally remain cool and collected.

Anne Walsh, who oversees $140 billion in bond portfolios as chief investment officer of fixed income at Guggenheim Investments, expects the Fed to hike in December and then hike four times in 2018.

But she doesn't believe that adds up to an aggressive tightening cycle.

"We're not in the camp that says rates will continue climbing across the rate spectrum," she said. "You will not see much change on the longer end of the curve."

Most forecasts have the Fed's overnight rate at between 2% and 2.25% a year from now, which is described as "closer to equilibrium," by Rick Rieder, chief investment officer of global fixed income at BlackRock, where he is responsible for $1.7 trillion in fixed-income assets.

Mr. Rieder expects the Fed to hike once in December and then three times in 2018, and said fixed-income investors should not expect any significant spike in yields across the board.

Donald Ellenberger, who helps manage more than $52.8 billion in bond portfolios at Federated Investors, said bond investors generally face a low risk of a spike in inflation that could drive rates higher. A greater risk is being overly exposed to certain higher-yielding credit sectors.

"Those are the two things that keep me up at night," he said.

More than 30 years into the fixed-income bull market, the end of the run is always in the back of most bond managers' minds, but Mr. Ellenberger said it's too soon to call this the start of the end of the bond market run.

But with the 10-year Treasury yield now hovering around 2.3%, he does not believe it is going back toward the 1.4% ranges of 2012 and 2016.

What's important to keep in mind about any potential end to the bull market in bonds, he said, is that higher rates can drive down bond prices, but don't always equate to lower total returns.

"As long as rates rise gradually and not too much, bond investors can still make money if coupon income exceeds price declines," Mr. Ellenberger said.

In addition to a gradual Fed tightening cycle on the horizon, bond fund managers also recognize the realities of a new Fed chairman in Jerome Powell, who will replace current Fed Chairwoman Janet Yellen in January.

A few wrinkles on that scheduled transition include Ms. Yellen's announcement that she will step down from the board once Mr. Powell is sworn in, completely removing her influence from the Fed.

The other factor is a reported consideration of adding Allianz chief economic adviser Mohamed El-Erian as vice chairman of the Federal Reserve Board.

Like most observers, Gary Zimmerman, managing partner of Six Trees Capital and founder of MaxMyInterest, doesn't expect a Fed guided by Mr. Powell will alter the near-term direction of rates, but he does like the shift away from academics and toward practitioners.

"Unlike most Fed chairs, Jerome Powell doesn't have an academic background, and Mohamed El-Erian has a unique combination of skills as an economist with a deep international background," Mr. Zimmerman said. "You would have a hard time finding a better choice than El-Erian to pair with Powell, especially coming out of this unprecedented period when monetary policy has been carrying the weight in the absence of fiscal policy."


What do you think?

View comments

Recommended for you

Upcoming Event

Oct 09


Diversity & Inclusion Awards

Attend the industry’s first event celebrating diversity and inclusion as well as recognizing those who are leading the financial services profession in this important endeavor. Join InvestmentNews, as we strive to raise awareness, educate... Learn more

Featured video


The importance of a diverse team

Clients, advisers, and even communities are telling firms that yes, diversity within the advisory community is important.

Latest news & opinion

Private Ocean grows to $2.2 billion with acquisition of Mosaic Financial

Combined financial planning operation gives the firm an expanded footprint in the San Francisco area.

Joe Duran has a game plan, and anyone can play

The CEO of United Capital built a formula for holistic financial planning that any firm can tap into — for a price.

LPL video about private equity looks like a swipe at Cetera

Recruiting video warns about potential consequences for advisers when a PE firm buys a broker-dealer.

Ladenburg chairman Phillip Frost steps down

The SEC charged Frost with fraud earlier this month.

Envestnet Tamarac partners with Schwab, TD on digital account openings

Auto-filling documents designed to make onboarding more efficient for RIAs and more convenient for clients.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print