Recent Rate Shock Will Keep Fixed Income Markets from Overheating Again


 
Author: Walter Kurtz
Location: Tokyo
Date: 2013-07-12

It is remarkable how the treasury market reversed the impact of Bernanke's original hawkish comments made back in May. A very similar daily move took place in the "belly" of the curve today with yields moving in the other direction.




In spite of Bernanke's apparent "reversal" with respect to the securities purchase program however, the bond market will not return to the frothy levels seen early this spring. There has been too much pain across the fixed income universe. Consider the following fact. Over the past 6 years (possibly longer), the largest 3-month downside price move in long-term treasuries occurred in the period from the close of 4/5/2013 to the close of 7/5/2013. It was nearly a 12% drop on a total return basis (including interest). In fact 5 out of 20 worst 3-month periods for long-term treasuries have been this year. This is something investors don't easily forget.
Worst 20 total return declines in long-term treasuries (20+ years) over the past 6 years
At least in the near term, even if the US economy stumbles, portfolio managers will maintain a much more moderate duration exposure vs. earlier this year (or last year). The sudden realization that rate products are not riskless and reaching for yield could be quite costly is going to be with us for some time.

To subscribe or visit go to:  http://www.riskcenter.com

http://riskcenter.com/articles/story/view_story?story=99915597