Cohen: Next big move in bonds is down

The bearish calls on bonds just keep getting louder.

Abby Joseph Cohen, senior in-vestment strategist at Goldman Sachs & Co., is the latest voice to join the swelling choir of market watchers predicting that bond funds are headed for trouble.

“The next big move we see in bonds is down,” she said last week at the Bloomberg Hedge Funds Summit in New York. “Bonds are usually safe, but it depends what yield you buy them at.”

With most bond assets trading at or near record-low yields, there would be little buffer should the Federal Reserve start raising the overnight rate. The Fed has said that it will keep rates at their lows until at least 2015.

A resolution to the fiscal cliff could pump up the economy, however. That, in turn, could force the Fed to raise rates earlier.

Long-only bond mutual funds, which have recorded more than $1 trillion in inflows since 2008, weren’t the only vehicles under scrutiny at the summit. Credit hedge funds also were given a less-than- enthusiastic endorsement.

“Credit strategies that performed well this year were highly leveraged,” said Jacob Gottlieb, managing partner and chief investment officer at Visium Asset Management. “Here, at the end of 2012, how much tighter can spreads get?”

Ms. Cohen sees a bright spot in stocks, particularly domestic large-caps.

“We think equities dramatically outperform fixed-income,” she said. “The internal dynamics of the U.S. economy aren’t bad.”

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