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What will happen if 1994's sudden burst in interest rates repeats itself?
That is the question being asked by industry overseers and by investors who want to protect their commitments to fixed-income investments after four years of historically low payouts.
That year, interest rates on 10-year Treasury notes were hiked more than two points to nearly 8%. This jump slashed more than $600 billion from the value of U.S. bonds at a time when total market size was $10.4 trillion.
In fact, the total return on long-term bonds was negative when President Bill Clinton lost control of both houses of Congress two decades ago, says Morningstar economist Francisco Torralba.
Skip forward to the present. The Federal Reserve and the European Central Bank this month said near-zero interest rates will remain in place, preventing or at least putting off the possibility of any similar shifts for probably two more years.
Eventually, the now-$38 trillion U.S. bond market will see rates slowly step upward, says Nuveen Asset Management Co-Head of Fixed Income Tony Rodriquez. It is a mystery whether a sudden jump in rates will occur and how big an impact on the value of bonds would result.
"We expect [interest rates] will remain pretty low over a two-year time horizon," Rodriquez said. "So we expect some modest upward pressure, but not enough that it will be a 1994 scenario with a very sharp rise in rates that really hurts fixed-income portfolios significantly."
Tough TimesThe 1994 panic saw the Barclays Capital U.S. Aggregate Index,...