The Fed says it’s going to keep interest rates low. You’d think that would make the outlook for bonds rosy. But not everyone is buying low interest rates.
Stepping back to see the larger picture, Jeffrey Nichols, senior economic analyst for Rosland Capital in Santa Monica, California, notes, “The Fed will be buying Treasury securities in the short-term and that should work for the short-term. But that leaves the Fed with little flexibility for the future.”
What’s spooking Nichols and plenty of other folk? Expectations of a period of rising interest rates because they see a reluctance on the part of other countries in continuing to buy dollar-denominated debt: Just look at China’s decision to buy Euros and dump dollars, reported on August 15 to have occurred in May and June. “With the euro much less scary now, countries like China are buying euros as an opportunity for diversification,” says Nichols.
His opinion is that we are headed for a long period of stagflation, with rising commodities and increasing inflation leading to expectations of higher nominal interest rates with bond prices falling. “The Fed is behaving ....