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The bond debate: Buy, sell or run

Tuesday, March 12, 2013 - 02:18

March 12 - Treasury yields have risen on signs of a strengthening U.S. economic recovery, prompting some bond investors to ponder whether it's time to get out now with more talk of the Fed pulling back on its massive stimulus. That worry may be premature. Conway G. Gittens reports.

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It's a jittery time to be a bond investor. Yields on the benchmark 10-year Treasury note - spiking to more than 2 percent in March after starting the year around 1.75 percent. And the move is even more profound in the 30-year bond. Yields have surged to around 3.2 percent from 2.9 percent at the start of the year. That has sparked a bit of a debate. For investment strategist Clark Winter, the time has come to get out of bonds. SOUNDBITE: CLARK WINTER, FOUNDER, CLARK WINTER ENTERPRISES (ENGLISH) SAYING: "There is increasing evidence that the economy is in fact growing and so at some point the Fed is going to have to do something with rates. So, smart people are getting out of the way of fixed duration, fixed income instruments and looking for other ways to get yield equivalents." But don't push that sell button so fast. Other fixed income watchers say investors are premature when predicting the Fed is on the verge of ending its $85 billion-a-month bond-buying binge. Michael Pond of Barclays thinks a drag from Washington will partly offset growth in the labor and housing markets, keeping the economy growing at a mere two percent by year's end. SOUNDBITE: MICHAEL POND, HEAD OF GLOBAL INFLATION-LINKED RESEARCH, BARCLAYS (ENGLISH) SAYING: "That's not the type of growth numbers that the Fed wants to see. We think the Fed will continue to, as Bernanke and Vice Chair Yellen talked about in the past couple of weeks, continue with QE3 as they have been and that will keep the sell-off limited." That's not stopping bond investors from excessive nail biting. No one wants to be caught on the wrong side of the trade if yields take a sharp turn upward. Michael Schumacher of UBS says he's been getting plenty of calls from institutional investors. He's telling them to stick with the tried and true. SOUNDBITE: MICHAEL SCHUMACHER, HEAD OF GLOBAL RATES STRATEGY, UBS (ENGLISH) SAYING: "I think that sticking with more traditional fixed income products makes a lot of sense, for instance U.S. mortgages look attractive to us. We've had that view for a while. They did very well in 2012, actually spectacularly well. They've had a tough time so far in 2013. We think they will continue to perform pretty well. Part of it goes back to the Fed." And it's the Fed that holds the key to who wins this debate. Bernanke has to unwind his asset-buying program without sparking a violent sell-off in the bond market. If that happens, borrowing costs will shoot up and that could make the overall economy a potential loser.

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The bond debate: Buy, sell or run

Tuesday, March 12, 2013 - 02:18