Do rising interest rates signal a bear market in bonds?

Federal Reserve Yellen
Federal Reserve Chair Janet Yellen speaks during a news conference in Washington, Wednesday, March 15, 2017. The Federal Reserve is raising its benchmark interest rate for the second time in three months and signaling that any further hikes this year will be gradual. (AP Photo/Susan Walsh)

A year ago, the Federal Reserve was looking for any reason not to raise interest rates.

“They were comfortable being behind the curve. Not so anymore,” Rick Pitcairn, chief investment officer of the eponymous Pitcairn investment firm in Jenkintown, said of last week’s first of three anticipated interest-rate hikes this year by the central bank.

“The psychology is different now,” Pitcairn said. “They’re predisposed to raise rates, and if economic data continue they’ll be able to do a series of raises this year,” which would bring short-term rates to about 1.5 percent.

The Fed’s view differs slightly from central banks such as the Bank of Japan, which Pitcairn visited this month as part of the Wigmore Association, a group of chief investment officers.

Moreover, their view of the Trump administration “is more pragmatic. If, in fact, Trump policies engender U.S. GDP growth to 3 percent, that bodes well for global growth. The worst thing that can happen is zero GDP growth.”

As a result of rising rates, Pitcairn hasn’t made any drastic changes in its fixed-income allocations.

“We have a lot of growth-oriented younger families, so in general we hold less fixed income, or perhaps we reduce the mix from 30 to 20 percent,” he said. “A lot is in municipal bonds for our taxable clients, and some corporates, less so in government bonds.”

“We have no real idea if the [new administration’s] policies will turn into growth,” Pitcairn added. “To the extent they don’t work, bonds will hang in there.”

The bond market could rally short-term as rate hikes moderate inflation, Jeffrey Gundlach, chief executive officer of Los Angeles-based DoubleLine Capital, said earlier this month on CNBC.

However, if you’re convinced — and that’s a big if — that the bull market in Treasury bonds, which began in about 1982, is beginning to end, then there are a few options out there.

Again, this is a bet that yields will rise and bond prices will fall — the thinking behind ETFs such as TBT and PST, said Kevin Tierney, who runs KJT Investments in New York City. Those ETFs rise in value as Treasury bonds fall in price.

“I’m buying those [TBT and PST] for client portfolios to short Treasuries as a small portion of their allocation," Tierney said, "but for myself, I’m shorting actual Treasury bonds on margin,” which is riskier, and can pay off in a bigger way.

Still, like in the car commercials, shorting Treasuries is truly only for professionals — a closed course with a professional driver, and please don’t try this at home.

Tax amnesty

Want to pay off back taxes while the Pennsylvania Department of Revenue is in a good mood?

During a 60-day period — from April 21 through June 19 — the Department of Revenue will waive all penalties and half the interest on eligible tax delinquencies for anyone who participates in the 2017 Tax Amnesty Program.

This provides individuals and businesses the chance to settle past-due bills on about 30 types of taxes. 

“Both Pennsylvania and Philadelphia had an amnesty program in 2010.  The programs usually result in an influx of tax revenue,” said Alan Mandeloff, of the Citrin & Cooperman tax-accounting firm in Center City.

The program applies to all state tax delinquencies owed as of Dec. 31, 2015, regardless of whether the state is aware of the delinquencies, said Robson & Robson, a King of Prussia-based law firm.

“This type of relief is rarely offered by the state. This is only the third tax amnesty program in the last 25 years. Further, failure to participate in the program may subject a taxpayer to an extra 5 percent nonparticipation penalty on balances owed,” the firm said in an email to clients.

In other words, if you don’t pay now, you could pay more later.

To participate, you must file to pay any taxes due after Dec. 31, 2015 — and you must file and pay by June 19, 2017. A tax-amnesty application is required. Taxpayers also need to submit all past-due returns. Anyone who participated in the 2010 tax-amnesty program is not eligible for the current program.

The program applies to all state income taxes, inheritance taxes, capital stock or foreign franchise taxes, employer withholding taxes, realty transfer taxes, corporate net income taxes, gross receipts taxes, and most other state taxes.

For guidelines and a webinar, visit the Pennsylvania Department of Revenue website (http://www.revenue.pa.gov/taxamnesty).

Business taxpayers may request a statement of account that shows all liabilities at www.etides.state.pa.us. Individuals may review account information, including all liabilities, by visiting the Personal Income Tax e-Services Center (www.doreservices.state.pa.us).