“Part of the 1994 bond market sell-off was really a policy error,” Gemma Wright-Casparius, who manages the $43.2 billion Vanguard Inflation-Protected Securities Fund at Valley Forge, Pennsylvania-based Vanguard Group Inc., said in a telephone interview May 1. “The Fed at that time was very bluntly moving the Federal funds rate and the communications strategy was not as efficient as it is now.”
Future Inflation
With bond yields at historic low levels for company securities as well as those sold by the Treasury, investors can expect “poor returns,” of about 1 to 2 percent, she said.
Concerns about future inflation propelled increases in long-term Treasury yields when the Fed raised rates in past cycles, Michael Gapen, director of U.S. economic research at Barclays Plc in New York and section chief of monetary and financial markets analysis at the Federal Reserve Board’s Division of Monetary Analysis from September 2008 through April 2010, said in a telephone interview April 29.
That’s less a threat now, as more than half the world economy, including the U.S. and the euro area, is experiencing inflation below the central banks’ desired levels as growth slows and commodity prices slide, according to Bank of America Corp. Consumer prices rose 1.3 percent in February from a year earlier, according to the Fed’s preferred gauge of inflation, matching the lowest level since October 2009.
‘Key Debate’
Whether yields rise quickly or slowly when the Fed begins to remove accommodation “is the key debate in the market at the moment,” Zach Pandl, a senior interest-rate strategist in Minneapolis at Columbia Management Investment Advisers, which oversees $340 billion, said in a telephone interview on April 30.
“The Fed is working very hard to improve the clarity of their communication, the transparency of their policy and they’re particularly worried about avoiding a repeat of 1994,” William Irving, a Merrimack, New Hampshire-based money manager at Fidelity Investments, which oversees $1.6 trillion, said in an April 30 telephone interview.
“The market is concerned enough about it and is focused enough about it that I think this reduces the likelihood of it happening,” Irving said. “If people are super-focused on a risk, chances are, that risk doesn’t materialize --something else that surprises people is what materializes.”