Fidelity’s $100 Billion Manager Says Rate Spike May Be Overdone

  • O’Neil says Trump’s agenda to spur growth faces obstacles
  • Manager says rates won’t be much higher a year from now

What's Driving the Selloff in Bond Markets?

Ford O’Neil, who oversees about $100 billion in bonds for Fidelity Investments, says the sharp run-up in yields since the election of Donald Trump may not be justified. 

O’Neil said he’s skeptical about the assumptions that a Trump agenda of increased government spending and tax cuts will be fully enacted and lead to faster growth, higher inflation and bigger budget deficits.

Ford O’Neil

Source: Fidelity Investments

“It is all based on speculation,” he said in an interview Friday in Fidelity’s Boston offices. “The market has glommed on to the good news about growth, but not how challenging it would be to enact such a program or negatives like restrictions on trade.”

Yields on U.S. Treasuries have surged the most since the “taper tantrum” in 2013 as traders assess the implications of some of the president-elect’s campaign promises. Trump has pledged to reduce personal taxes across the board, cut corporate taxes to 15 percent from 35 percent and spend from about $500 billion to $1 trillion to rebuild the nation’s crumbling infrastructure. Based on the lower end of that range, his plans would boost the nation’s debt by $5.3 trillion, according to an estimate by the non-partisan Committee for a Responsible Federal Budget.

Reining In Rates

O’Neil, one of the managers of the $26 billion Fidelity Total Bond Fund, said rising bond yields could be reined in by at least three forces: Federal Reserve Chair Janet Yellen’s commitment to a very gradual program of rate hikes, the traditional aversion to budget deficits by the Republican-controlled Congress, and buying by overseas investors who may use the recent jump in rates to snap up more Treasuries.

“While there will be upward pressure on rates, we don’t expect that rates will be materially higher a year from now,” said O’Neil.
 
The 10-year Treasury note yielded 2.21 percent Monday, up from 1.86 percent on Election Day on Nov. 8.

If Trump follows through with campaign promises to take a tougher line on global trade, that could act as a brake on U.S. growth, said O’Neil. As a candidate Trump said he would renegotiate or scrap international trade deals like Nafta.

O’Neil said that he likes Treasury Inflation-Protected Securities, leveraged loans and corporate credit, both high yield and investment grade.

Fidelity Total Bond gained 6.1 percent this year, better than 88 percent of peers, according to data compiled by Bloomberg. Over five years the fund topped 78 percent of rivals.

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