US bond investors at crossroads

Following the Fed’s decision that it might raise interest rates once more this year, the yield on two-year U.S. Treasury bonds reached a peak. Strategists are optimistic about bonds with interest rate cuts on the table next year. The question of whether the Fed will end interest rate hikes is critical for bond investors. Following the Fed’s decision that it might raise interest rates once more this year, the yield on two-year U.S. Treasury bonds exceeded 5 percent, reaching a peak in 2006, and the yield on 10-year bonds exceeded 4.5 percent, reaching a peak in 2007. However, strategists are optimistic about bonds with interest rate cuts on the table next year. According to Ed Al-Hussainy, strategist at Columbia Threadneedle, short-term bonds could perform well in a scenario where the Fed returns to rate cuts within a few years. “If you don’t think the Fed will hold interest rates steady for two years, two-year bonds offer significant value to investors,” Al-Hussainy said. Arguing that the employment market has remained vibrant this year but will not be able to maintain this momentum next year, Al-Hussainy believes that a cooling labor market could trigger a bond rally. According to the Bloomberg index, which tracks US bonds, US bond investors have lost 1.2 percent this year. Long-term bonds have lost 6.6 percent. Bonds are heading toward negative yields for the third year in a row.