In short: This rising-rate environment may stick
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%.