A Variant View On Bonds

One of my original muses is a fellow I refer to as  the bondman.  He's been in the bond business for over forty years and has forgotten more about that trade craft than I'll ever know.  He has a variant view on interest rates.  While the world expects US interest rates to rise next year, he's not so sure.  He gave me three reasons on Monday why that might not happen.  These by-the-way are not in any particular order.

1.  World interest rates are lower than  in the US and expected to stay that way overseas.  He thinks it will be hard for rates to go much higher here when the rest of the world is still in easing mode.

2.  The Federal Reserve has added by his calculations something like four trillion dollars of bonds to their balance sheets with all of its bond buying over the past few years.  He doesn't think the Fed is going to trade against itself by willingly raising rates on bonds.

3.  The economy is still fragile and he doesn't see the "Feds" raising rates until it's on better footing.  I think this is his most important point.  A lot of business and commerce has been done over the past few years on the backs of historically low rates.  I bought a car in 2013 with zero money down and at a 0% interest rate.  That's saving me a lot of cash over the life of the loan.  Multiply me by the 15 million cars sold last year and you see how this has rippled through the economy.   Or take a look at the home mortgage market.  Housing has been problematic over the past five years without rates rising.  Hard to imagine what happens there if rates were to rise.  The fact is that the low interest rates of the past few years have been pure economic stimulus for the consumer that can take advantage of them.  Low rates have not only put money back in peoples pockets {lower rates means less money spent on interest service} they have also allowed consumers and businesses to repair their balance sheets by refinancing. Bondman doesn't think the "Feds" will be willing to take that away so quickly.

Just passing this along for the good of the Corp.  I think we could see a moderate rise in rates next year.  Maybe 100 basis points, which I don't think would be a drag on growth but Bondman thinks I'm wrong.  Irrespective of this though, his bond portfolios are short term in duration-in the 3-7 year range.