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Long-term Treasury bonds: Vulnerable to Fed rate hikes
With the Fed poised to boost interest rates, Treasury bonds with maturities of 10 years or more are "a bad place to allocate capital," says Convergex's Colas. "Bond yields have to move higher if the economy continues to improve and the Fed raises rates." When yields go up, bond prices fall.
Colas sees economic growth of 2% to 2.5% next year. "That's not great, but it's sound enough to make the long end of the yield curve go higher," Colas says.
He acknowledges that long-term Treasury yields failed to rise in the face of Fed easing in the mid-2000s. But with the 10-year Treasury around 2.3%, less than 1 percentage point above its 2012 record low of 1.395%, "it's hard to believe that if we get another year of economic growth and we get Fed rates, the long end doesn't need to sell off," Colas says.
The Fed has kept short-term interest rates near record lows for more than 6 years. Colas expects the central bank to lift rates 2 to 3 times in the next 12 months, by 25 basis points each time.