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In short: This rising-rate environment may stick

As of 06-21-2013

Viewing tapering as the first step toward tightening—however distant the latter may be—the market has adjusted its thinking to see the Fed’s course of action as a source of risk. The only debate is whether this worry is priced into 10-year Treasury yields at current levels (2.48% at this writing), reached rapidly after Fed Chairman Ben Bernanke laid out the hypothetical path for the beginning of tapering and the end of QE. At present, Federated’s bond team feels the risk on yields remains to the upside, fueled by likely bond-fund redemptions, a decline in mortgage refinancings and other factors that should act to boost secondary-market selling, cull demand and push yields higher. Of course, how fast and how much higher long yields move is in part tied to the economy. If it disappoints and risk assets stumble more than they have, there could be some downside pressure on yields. For now, however, we see rates more likely to move up than down and thus are shortening duration on our benchmark portfolio model to 90% from 95%.

R.J.  Gallo
R.J. Gallo, CFA
Senior Portfolio Manager, Head of Municipal Bond Investment Group, Head of Duration Committee

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Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.
Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.
Duration is a measure of a security's price sensitivity to changes in interest rates. Securities with longer durations are more sensitive to changes in interest rates than securities of shorter durations.
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Copyright © 2014 Federated Investors, Inc.

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