By James Saft
(Reuters) – Guess what, bond investors: just like the Federal Reserve, you are trapped.
The Fed on Wednesday said it was keeping rates on hold until at least late 2014 but failed to tip its intentions clearly about any possible additional round of quantitative easing. The Fed once again stressed the “significant downside risks” from “strains in global financial markets,” a nod to the backwash from euro zone issues, having eliminated this language from its last statement.
Going strongly into equities seems brave given the bumpy recovery and with continued risks of fallout from Europe, even with an implied promise of a safety net from the Federal Reserve. That leaves the rather unlovely option of government bonds, now 30 years into a bull market and offering low yields and the, distant, possibility of big losses when the Fed eventually hikes rates or gets behind the inflation curve.
“The Fed can no longer do what it once could, which is to take preemptive strikes against inflation,” Jeffrey Gundlach of DoubleLine Capital told a convention of investment advisers, speaking before the Fed announced its decision.
“They will stay low for as long as we are in this debt morass. Jobs have snapped back less and less since the late 1980s. Do you think it might have something to do with this debt experiment we’re in?”