Stay Above the Interest Rate Fray

INCOME INVESTING

- Jeffrey R. Kosnett

Fixed-income veterans remember the 2013 “taper tantrum,” when bond prices plunged after the Federal Reserve said it would scale back a massive bond-buying program. This year, we are having the tantrum in reverse, a bond-buying binge that means bulls like me can claim victory. The surprisingly sharp downturn in medium-term and long-term interest rates since April is a fresh challenge for devotees of the dogma that the escalating inflation readings and strong (although temporary) economic growth will soon translate to higher rates on savings accounts and bigger cash distributions from bond funds.

The original tantrum refers to the stretch from May through early September of 2013, when 10-year Treasury yields soared from 1.6% to 3% (and T-bond prices fell by 10% or so). There was no inflation to speak of in 2013, oil prices were already high, and the 2008 economic bust was done. The surprise was the speed and the ferocity of the bond-price breakdown, not that interest rates could move up.