Kames Capital’s David Roberts warns of rising US interest rates

David Roberts, head of fixed income at Kames Capital, has interpreted recent comments from US Federal Reserve chairman Janet Yellen as pointing to rising interest rates as soon as early 2015.

Last week Janet Yellen gave her clearest signal yet that US Fed Fund rates are likely to move higher in the next 12 months. Although most people in the market would have claimed this was ‘in the price’, the market reaction was severe. The yield on five year bonds rose by almost 20 basis points, while the yield on 30-year bonds increased by a little more than five basis points.

Rates could rise as soon as six months after the Fed finishes its quantitative easing programme, which was further tapered by $10 billion a month last week. In addition, stronger than expected economic data could even see the pace of tapering increased meaning QE could end sooner than investors expect.

Longer dated bonds are traditionally much less sensitive to the odd move in interest rates and in particular exactly when those moves occur. For example if interest rates go up in six months or 12 months’ time it makes a huge difference if you want to fix your deposit rate for the next year. But if you have money to put away for 30 years, that six month window is less important.

Yellen has kicked investors out of their complacency and into the mindset that rates will have to rise particularly at the short end of the yield curve.

Looking ahead, if the US is about to embark upon a series of interest rate hikes, then short-dated bonds should continue to underperform. Perversely perhaps, investors can continue to benefit from longer-dated assets, particularly once rates begin to move higher.

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