International interest in U.S. bonds makes the chances for a serious fixed-income liquidity event low, says David Mazza, head of ETF and mutual fund research at Boston-based State Street Global Advisors
“I think the fears of a liquidity event are overblown, at least in the near term,” Mazza says. “The foreign investment has kept inventories of Treasuries quite low, and we know that inventories of things like corporate bonds have decreased significantly, driven by regulation. There is some potential for a taper-tantrum type event, I believe that’s something the Fed is seriously concerned about, but that probably wouldn’t look like a catastrophic sell-off.”
Investors might also overestimate the Fed’s impact on bond prices, says Matt Brill, senior portfolio manager for Atlanta-based Invesco. After the Fed raised rates in December by 25 basis points, the 10-Year U.S. Treasury yield continued to drop, falling more than 60 basis points, the Five-Year dropped more than 50 basis points, and the Two-Year dropped more than 20 basis points.
Brill maintains that if bonds are used for their central purpose —stable, low-risk investments within a portfolio — and held until maturity, investors have little to fear, especially if their money is in high-quality areas of the market.
“The people who are afraid of a bond bubble or a liquidity event need to have bonds explained to them,” Brill says. “If you went out and bought a 10-Year Treasury and thought the current rate was a bubble, you would still make the current rate holding the bond. If you wanted to sell the bond, you could take a loss, but if you owned the bond to maturity there’s no credit risk. You don’t have to worry about what you signed up for.”