3% is noteworthy but it's not signaling a spike 3% is noteworthy but it's not signaling a spike http://www.federatedinvestors.com/static/images/fed-logo-amp.png

3% is noteworthy but it's not signaling a spike

The bias on rates remains up, just not as much.
Published

Federated’s duration committee today trimmed its tactical short position for fixed-income portfolios

The move was driven primarily by technical factors led by the 10-year Treasury’s break above 3% this week and a 23 basis-point increase in the broader U.S. Treasury Index in the three weeks since the duration committee last met. Yields are now trading above the highs of their two-month trading range. The committee does think further increases in yields could confront resistance. Deterrents include the equity market's negative reaction to the breach of 3% on the 10-year, the apparent loss of growth momentum in other developed countries and ever-present event risks (geopolitics, trade, presidential tweets, etc.).

That said, the duration call is being kept short of neutral as the committee still sees the bias on rates as higher for four reasons: 1) expectations inflation will continue to rise toward the Fed’s 2% target; 2) strengthening U.S growth despite an anticipated weaker first-quarter GDP print this week (the initial Q1 GDP estimate is due Friday); 3) the likelihood for two and possibly three more rate hikes this year from a “gradualist” Fed; and 4) rising fiscal deficits in the wake of tax cuts and spending increases.

What short duration means

Duration reflects the sensitivity of a fixed-income instrument (or a fixed-income portfolio) to changes in market interest rates. Longer maturity bonds tend to have longer durations. Being “long duration” means a fixed-income portfolio has a duration that is higher—more sensitive to changes in market rates—than its benchmark and thus would gain in value relative to its benchmark if market yields decline. Short duration is the opposite, meaning a portfolio has a duration lower than its benchmark and the portfolio will decline in value less than its benchmark if market rates rise.

TAGS Fixed Income Fiscal Policy Active Management Taxes United States Income
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DISCLOSURES

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.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

Bloomberg Barclays U.S. Treasury Bond Index is part of Bloomberg Barclays Capital global family of government bonds indices. The index measures the performance of the U.S. Treasury bond market, using market capitalization weighting and a standard rule based inclusion methodology. Indexes are unmanaged and investments cannot be made in an index.

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