Bond Market Volatility Likely to Continue in 2016

Short and long-dated Treasuries have nearly identical returns this year, with Barclays indices showing 0.71% returns for 1-3 year Treasuries and 0.68% returns on the 20-year-plus index. Expectations that the Fed will make successive rate hikes may favor long-dated Treasuries, however. Rick Rieder of Blackrock says such successive increases “will benefit the long end (versus) the short end”, so “the long end is the better part of the curve.” He said gradual rate increases will benefit 30-year Treasuries and avoid a flood of supply that would depress prices. Nonetheless, Rieder said he is moderately bullish on short-dated Treasuries currently, while also noting that Blackrock uses Eurodollar futures contracts to bet against short-dated Treasuries across its bond portfolios. Julien Scholnick of Western Asset Management Co. predicts three rate increases in 2016 and that anxiety over timing will put more selling pressure on short-dated Treasuries. “The increases in volatility that we’ve seen over the course of the year is not going to end” due to the first rate increase, he said. His firm is overweight on long-dated Treasuries, partly because it expects inflation to remain low. Higher short-term interest rates reduce spending and thus restrain inflation, he suggested. Michael Templ of Pioneer Investments agreed that anxiety over future rate increases would remain, noting that his firm has positioned for a flattening of the curve in 2016. It’s multi-sector bond funds are shorting 2-5 year Treasury futures and remain neutral to bullish on long-dated Treasuries.