Bondholders face a difficult time
This year may see slightly higher rates on certificates of deposit. The odds of that improved dramatically after actions taken by the Federal Reserve at its December rate-setting meeting when it decreased monthly asset purchases by $10 billion.
In December, the Fed took its first step in tapering its monthly asset purchases by paring them by $10 billion, to $75 billion.
The central bank is likely to raise the federal funds rate in 2015, according to Dan Geller, senior vice president of Market Rates Insight, a pricing consultant to banks. Based on historical patterns, he believes that could lead to a "modest and gradual increase in deposit rates in the second half of 2014," he wrote in a newsletter to his clients.
Bonds will tell a different story next year. In December, the Fed took its first step in tapering its asset purchases from $85 billion to $75 billion in mortgage-backed securities and Treasuries that it's been buying each month. It's a dangerous time for bondholders, says William Larkin, fixed-income manager at Cabot Money Management in Salem, Mass. As yields rise, the bond prices fall.
"At some point, you have to be defensive and say I have to do something different, step out of the way and let the market get to a market-driven rate environment. We're in a price-controlled market," he says.
Continue to next page.