SIT Investment Associates’ Bryce Doty issues a warning on spiking interest rates, but says investors can still play the volatility
The bond market may be the next area to shock investors.
While Wall Street copes with a volatile stock market, one bond fund manager warns treasury yields are on the verge of a breakout to the upside. Yields, which trade inversely of bond prices, can put upward pressure on everything from mortgage rates to credit cards, and pose a risk to economic growth.
In an interview with CNBC, SIT Investment Associates’ Bryce Doty estimated the surge will likely be timed to the outcome of the midterm elections.
“The markets in general hate uncertainty. We get passed the election… that could calm things down and rates will probably spike,” he said Thursday on CNBC’s “Futures Now.”
The 10-Year Treasury Note yield hit its 2018 high of 3.26 percent on October 9 — its highest level in more than seven years. Doty sees the 10-Year yield ending the year around 3.50 percent. By the end of 2019, he expects it it’ll get as high as 4.50 percent.
“A lot of people are afraid of rates going up,” he noted.
But not in Doty’s case. This environment has been profitable for him because he runs the firm’s RISE exchange-traded fund (ETF), which is designed to profit from rising rates. His fund is up more than 7 percent in the past 52-weeks, according to Morningstar.
“The best trade of the year has been shorting treasury futures. It basically takes this worry and this fear – these things that the Fed could do and not do – and turn it into a hope,” he said. “Shorting 5-Year Treasury futures, I think, is a money maker.”
He pointed out that the Federal Reserve’s decision to step away from easy money policies will be a bigger driver for rates. He predicts a massive influx of treasuries flooding the market will exacerbate the situation.
“In the next year, there is going to be a trillion dollars of additional treasury supply just to cover deficits. At the same time, the Fed will have half a trillion less demand,” Doty said. “Where is that money going to come from? Who is going to fill that void?”