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By Christine Benz | 12-15-2010 10:08 AM

Recent Bond Bumpiness: More Than Just a Hiccup?

Morningstar's Eric Jacobson comments on recent bond performance and the odds of a runaway rising rate spike.

Christine Benz: Hi. I'm Christine Benz for

After performing quite well for the better part of this year, the bond market has recently come under pressure. Here to discuss what's been going on with bonds and whether this is a precursor of things to come is Eric Jacobson. He is director of fixed-income research for Morningstar.

Eric, thanks so much for being here.

Eric Jacobson: Glad to be with you.

Benz: So, let's talk about what's going on in the bond market. What is putting pressure on bonds currently in your view?

Jacobson: There are really a handful of things, and it's sometimes difficult to sort out what's affecting which part of the market. I think that some of the response to the latest tax bill that's been going through has sort of reinvigorated the discussion around whether or not rates need to be higher. We've also had the effect, which is double-edged, in terms of the ongoing Fed policy, enactment of what they call QE2, quantitative easing.

So there is some kind of crosscurrents in there, because on the one hand you've got the Fed buying up bonds that in some ways is expected to have a depressive effect on rates and upward pressure on prices.

On the other hand, you've got the positive effect of the action itself, which is what's intended, which is a revaluation of where growth is in the economy.

So it is sort of hard to ferret out, what's the positive, what's the negative. But by and large, when you add the tax legislation and the effects of the quantitative easing, if you will, I think by and large, investors are reassessing what the growth possibilities are in a positive way right now at least in the short term.

Benz: So when you talk about the tax package having an effect here, the concern at least in the bond market, appears to be that it might be overly stimulative or that it would drive inflation perhaps?

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