* * * * * J B K * * * * *
San Francisco
Rising interest rates remain a forecast and not a certainty. Even if the Federal Reserve begins to push up its short-term policy rates from, that doesn't necessarily translate into significantly higher yields -- and therefore lower prices -- for intermediate- and long-term bonds.
The bear case for bonds would appear to be obvious. The Fed at some point will raise its target rate for overnight federal funds from the current rock-bottom range of 0-0.25%. Even though the central bank has said it intends to keep the fed-funds target at very low levels "for an extended period" -- which would extend well into the second half of the year -- some increase eventually is inevitable. Indeed, maintaining a near-zero policy rate already risks a rise in inflation.
Moreover, the Fed is due to wind down its purchases of $1.25 trillion in mortgage-backed securities issued by federal agencies Fannie Mae (FNM) and Freddie Mac (FRE) along with buys of $175 billion of direct agency obligations. Meantime, the massive federal deficit means the Treasury will be spewing out trillions of dollars of bills, notes and bonds annually for as far as the eye can see. The quantity of state and local debt is going up while its quality is deteriorating because of their well-advertised fiscal problems. And while corporations' balance sheets are in good shape, their bonds' margin of safety have shriveled as yields have plunged.
http://online.barrons.com/article/SB126756452820554659.html?mod=BOL_hpp_highlight
