Fed’s pro-hike outlook may end bond bull run

The central bank has switched strategies; investment firms now reassessing Treasurys.

PHILADELPHIA — A year ago, the Federal Reserve was looking for any reason not to raise interest rates.

“They were comfortable being behind the curve. Not so anymore,” Rick Pitcairn, chief investment officer of the eponymous Pitcairn investment firm in suburban Philadelphia, said of this month’s first of three anticipated interest-rate hikes this year by the central bank.

“The psychology is different now,” Pitc airn said. “They’re predisposed to raise rates, and if economic data continue they’ll be able to do a series of raises this year,” which would bring shor t-term rate s to about 1.5 percent.

The Fed’s view differs slightly from central banks such as the Bank of Japan, which Pitcairn visited this month as part of the Wigmore Association, a group of chief investment officers.

Moreover, their view of the Trump administration “is more pragmatic. If, in fact, Trump policies engender U.S. GDP growth to 3 percent, that bodes well for global growth.

“The worst thing that can happen is zero GDP growth,” Pitcairn said.

As a result of rising rates, Pitcairn hasn’t made any drastic changes in its fixed-income allo- cations.

“We have a lot of growth-oriented younger families, so in general we hold less fixed-income, or perhaps we reduce the mix from 30 to 20 percent,” he said. “A lot is in municipal bonds for our taxable clients, and some corporates, less so in government bonds.”

“We have no real idea if the (new administration’s) policies will turn into growth,” Pitcairn added. “To the extent they don’t work, bonds will hang in there.”

The bond market could rally short-term as rate hikes moderate inflation, Jeffrey Gundlach, chief executive officer of Los Angeles-based DoubleLine Capital, said earlier this month on CNBC.

However, if you’re convinced — and that’s a big if — that the bull market in Treasury bonds, which began in about 1982, is beginning to end, then there are a few options out there.

Again, this is a bet that yields will rise and bond prices will fall — the thinking behind ETFs such as TBT and PST, said Kevin Tierney, who runs KJT Investments in New York Cit y. Those ETFs rise in value as Treasury bonds fall in price.

“I’m buying those (TBT and PST) for client portfolios to short Treasurys as a small portion of their allocation,” Tierney said, “but for myself, I’m shor ting actual Treasury bonds on margin,” which is riskier, and can pay off in a bigger way.

Still, like in the car commercials, shorting Treasurys is truly only for professionals — a closed course with a professional driver, and please don’t try this at home.