In a January 6 Investment News article by Jeff Benjamin, Baird Advisors' Warren Pierson discussed the 2018 outlook for bond investing.
Jeff Benjamin: What is your outlook for interest rates in 2018?
Warren Pierson: We expect some modest upward pressure on rates, partially because the Fed will nudge short-term rates up. We say a little bit because there are some structural headwinds that have been in place for several years, such as an aging U.S. population of baby boomers who are retiring.
The other headwind is the theme of technology displacing labor, which has strong disinflationary factors.
JB: What do you think about the changes at the top of the Federal Reserve?
WP: We think at the margin, it adds more uncertainty. The Fed has taken its aircraft carrier into uncharted waters, and they are now backing it out and switching out half the crew at the same time. The question is, will the market accept what they're doing?
JB: What are some of the risk factors facing fixed-income investors in the year ahead?
WP: The Fed and other global central banks have created so much liquidity that the [CBOE Volatility Index] is at all-time lows. Investors have become complacent about risk, but the risk is still there.
The concern we have is that a lot of investors are outside their normal risk parameters, and it's all been OK because volatility has been low. But if the Fed pulls back liquidity, will that cause volatility to go up?
JB: How long do you think the bull market in bonds will last?
WP: We're not market timers, so we don't try to add value by making those big calls. But it's hard for us to see an environment where rates rise significantly in the coming year. We still see a period of lower rates, longer.
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Past performance is not indicative of future results and diversification does not ensure a profit or protect against loss. All investments carry some level of risk, including loss of principal. Some of the potential risks associated with fixed income investments include call risk, reinvestment risk, default risk and inflation risk. Additionally, it is important that an investor if familiar with the inverse relationship between a bond's price and its yield. Bond prices will fall as interest rates rise and vice versa.