The recent bond selloff could be overdone, according to strategists at Charles Schwab Investment Management, who think longer-term rates could be fairly stable next year.
On Wednesday, when the Fed raised its benchmark interest rate from a range of 0.25 to 0.5 percent to 0.5 to 0.75 percent, the central bank sounded surprisingly optimistic about the economy, said Omar Aguilar, chief investment officer of equities at Schwab’s investment management unit.
“We saw a very confident Fed,” Aguilar said during a Friday conference call. “They made it sound [like] rates will continue to rise [with] a very hawkish tone” toward the bond market. “If you look back at historical hikes, they usually try to balance it with a bit more dovish comment.”
The Fed’s updated dot-plot diagram indicated three hikes next year, while the market was anticipating two, said Brett Wander, chief investment officer of fixed income at Schwab Investment Management.
But Wander and Aguilar doubt that the rate on the benchmark 10-year Treasury will go up much this year, if at all.
“One thing to keep in mind is that [Fed chairman] Janet Yellen, by nature, is very dovish in her approach. That’s not likely to change … so there’s a much greater risk that [rate rises] are slower,” Wander said.
And “to date, we haven’t seen data that’s particularly inflationary,” he added. “Until we do, I think the Fed will proceed very, very cautiously. I think the market got ahead of itself.”
Nervousness has been exacerbated by anticipated tax cuts and fiscal stimulus from a new Trump administration. But those policies might eventually lose momentum when faced with political realities, Wander said.
He expects to see yields next year from 2.25 percent to 2.50 percent on the 10-year Treasury, down a bit from the current 2.60 percent, unless there’s inflation above the Fed’s 2 percent target.
“And the past few weeks have just been stellar for the equity market [but] we could see a downturn, and that could cause a rally in the bond market,” Wander said.