The probability of a bond market sell-off has risen during the past 3 months due to: (1) an increase in deficit spending due to the new tax law; (2) an increase in deficit as a result of the Bipartisan Budget Act; (3) the Fed’s decision to sell $200 to $400 Billion of Treasuries instead of buying Treasuries; and (4) Secretary Mnuchin’s statements on allowing a weaker dollar.
This is something we have anticipated for some time. Interest rates are beginning to move higher, from almost 10 years at historic lows. If interest rates were to rise sharply, the principal value of bonds and bond mutual funds already owned in your portfolio may decrease. Long-term maturities would decrease the most. In preparation, our asset allocation models have substantially reduced the maturity of bonds in an attempt to manage the effect of a bond market selloff (if one were to occur). We are watching this event closely and will keep you posted on any further impact this may have on our overall fixed income strategy.