Page 24 - ARUBA TODAY

Monday 24 July 2017 BUSINESS
A24

Funds Q&A: How much more will interest rates climb?

By STAN CHOE federal borrowing level is
AP Business Writer Q: Many voices are calling changing. Supply and de-
NEW YORK (AP) — Every- this a big inflection point for mand (for Treasurys) come
where bond-fund investors the bond market. How mo- much more in balance,
look, reasons to fear seem mentous is this right now? which means rates can
to be lurking. A: I would agree that things move higher.
After decades of drop- are changing, but I don’t
ping interest rates led to think they’re momentous. Q: How much higher?
strong and steady returns Rates are going to move A: We think 2.50 percent
for bond funds, condi- moderately higher. There’s to 2.75 percent for the 10-
tions seem to be massing a demand for income in year Treasury this year. You
in the opposite direction. the world driven by demo- can move to 3.25 percent
The Federal Reserve raised graphics that’s generation- next year.
short-term rates last month, ally historic, and whenever
the third time it’s done so rates back up, you see this Q: Inflation has also re-
since December. It’s also tremendous buying come mained low for a long time
planning to pare the vast in (which in turn lessens the now, and it sounds like you
trove of bonds it built up upward pressure on rates). think it can stay that way
to keep rates low following The only thing that’s differ- for a while, which would
the financial crisis. This photo provided by BlackRock shows Rick Rieder, chief in- ent than historically is the moderate rising rates.
Even words from way vestment officer of global fixed income at BlackRock. Rieder interest-rate sensitivity of A: One of the reasons why
across the Atlantic are rat- spoke with The Associated Press about shifts in the bond market. the market is higher. Small this is an inflection point but
(Jerry Goldberg/Courtesy of BlackRock via AP)
tling the U.S. bond market. moves in rates can lead not momentous is we’re
The European Central Bank T-note up to 2.35 percent into bond funds through to decent-sized moves in witnessing something that’s
said a couple weeks ago from 2.13 percent. the first five months of this price. truly historic. First, what
that it could trim stimulus Rick Rieder, chief invest- year, nearly double last drove the volatility in infla-
efforts if that region’s econ- ment officer of global fixed year’s pace at the same Q: So many factors seem to tion over the last 25 to 30
omy keeps strengthening. income at BlackRock, point, according to the In- be pushing the U.S. bond years was energy and oil.
That could send European which manages $1.6 trillion vestment Company Insti- market, not just the Fed We’re witnessing a greater
rates higher, luring money in bonds, says the bond tute. That deep hunger for raising rates. equilibrium in oil, and OPEC
back into European bonds market is indeed going income, a result of an ag- A: Long-end interest rates doesn’t drive the price any
and out of Treasurys. through a change. But he ing population looking to are influenced more by more. There are so many
Anticipating such a shift, cautions investors not to retire, should help keep the the European Central Bank other players.
investors pushed Treasury get carried away. upturn for rates moderate, and the Bank of Japan Second is housing prices.
prices lower over the past Demand for bonds has re- Rieder says. than the Fed, ironically. You go back 20 or 30 years,
two weeks, helping to send mained strong this year, Answers have been edited When Europe takes some and the Baby Boomers
the yield on the 10-year and $170 billion flowed for length and clarity. of the pressure off interest were driving the environ-
rates, it’s so dramatically ment for housing prices,
large, it allows the long and you don’t see that
end of our interest rates to now.
move out. Third, technology is press-
ing down on inflation like
Q: What about the Fed nobody’s ever seen be-
paring back its $4.5 billion fore. You saw it in the last
in bond investments? Will (Consumer Price Index)
that have a bigger effect report. From apparel to
on the market than any transportation, i.e. the Uber
rate increases? effect, you’re creating this
A: They’re starting very, unbelievable pressure on
very slowly. The reduction potential inflation.
of the balance sheet, this Inflation will go higher, but
year, is a smaller influence we’re going to be in this
than a rate move. They’re range of in and around 2
talking about $10 billion a percent inflation.
month, which relative to
the size of fixed income Q: So what can investors
markets is tiny. expect from their bond
But in the next two years, funds? Certainly not the big
the pace is increasing at returns they got from earlier
the same time that the years. q