Bond Yields Will Rise in 2018

Good news for income investors - fixed income is going to pay a better rate of interest next year, says Morningstar's Peter Gee

Peter Gee 27 December, 2017 | 11:16AM
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The process of normalisation of interest rates in the major developed economies is, very slowly and gradually, getting under way, and interest rates look likely to rise in 2018, creating issues for bond investors. At the Fed’s latest meeting, the policy participants made forecasts of where they think the Fed fund rates will go over the next few years. This time round, the forecasts were, on average, for three further 0.25% increases by the Fed in 2018. That’s rather more than financial markets currently think will actually happen.

Futures prices, as recast in the CME Group’s “FedWatch” tool, say there is only a 7% chance of all three increases, with only one looking rather more likely. But either way the Fed is clearly moving away from its previous very stimulative stance, via both higher short-term rates and a wind-down of its bond-buying, which had been keeping bond yields low.

Some other major central banks have also moved away from their previously ultra-easy policy, notably the Bank of Canada and the Bank of England. However, the European Central Bank thus far has only reached the point of buying fewer bonds each month than previously: It is still adding to its stock, whereas the Fed has progressed to running down its stockpile.

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Peter Gee  is a Fund Analyst for Morningstar Australia