Thomas Atteberry is co-manager of FPA New Income fund.
KIPLINGER'S: What's up -- pardon the pun -- with rates?
ATTEBERRY: There's been a tug of war going on between people who think the Federal Reserve is going to lower short-term rates and those who think the Fed is not. The arm-wrestling has gone back and forth. The last run-up represents a realization that the Fed is going to keep the federal funds rate -- a key short-term benchmark -- at 5.25% for a while. Yet if you look at Treasuries at the start of the summer, most yielded less than that. You can't justify such low yields when it's clear that the Fed thinks the economy is too strong and inflation too much of a risk to ease interest rates.
Where do rates go from here? They're near the top now. The question is, do they top out at 5.25%, 5.35%, or maybe 5.45%?
Time to lock in? We've had a short-term focus in our portfolio for quite a while, owning notes with an average maturity of less than two years. But a few weeks ago, we started to purchase five-year Treasuries -- when yields get to 5.15%, it makes sense to nibble. Don't look longer-term yet. Beyond a five-year maturity -- maybe seven years -- you're not getting paid for the risk that rates will rise more.
Is the bond market going to calm down? Not for a while -- I think volatility is here to stay.