The year is ending with some pain for 2014's biggest bond winners.
After gaining 27 percent this year, the longest-term Treasuries are now falling, with yields posting the biggest two-day jump since July 2013. The notes have lost almost 2 percent since Dec. 16, the day before Federal Reserve Chair Janet Yellen suggested she may raise interest rates in the middle of next year, making comments that confused the market about whether she was hawkish or dovish.
This may mean a turbulent year lies ahead for investors who piled into longer-dated bonds as they girded for slower growth across the globe with oil prices plummeting. If the U.S. economy keeps showing signs of improvement—as it has this year—those investments may be losers.
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Pacific Investment Management Co. "expects global growth to accelerate in 2015," the Newport Beach, California-based fund manager said yesterday when releasing its economic outlook. "We see limited upside for high-quality" interest-rate sensitive debt such as Treasuries, U.K. gilts, or German bunds.
Of course, traders have been preparing for higher benchmark yields for years, only to find themselves stuck with losses as bonds rallied time and again. Treasuries have gained almost 6 percent this year, more than high-yield securities, according to Bank of America Merrill Lynch and Bloomberg data.
Still, Yellen sounds serious about increasing rates next year if growth continues its upward trajectory. She said at a Dec. 17 press conference in Washington that policy makers' "statement that the committee can be patient should be interpreted as meaning that it is unlikely to begin the normalization process for at least the next couple of meetings."
While analysts debate whether that meant the Fed is planning to increase borrowing costs in the middle of next year, some bondholders aren't waiting to find out.
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