NY Fed's Dudley: The Bond Market is 'Stretched'

If your portfolio is bond heavy, you may want to take some profits. In an exclusive interview with FOX Business Network’s Peter Barnes, New York Federal Reserve president William Dudley said bonds may be long in the tooth.

“I would argue the one area which looks a little bit stretched to me is the bond market,” said Dudley when asked whether he was concerned about bubbles in financial markets. He pointed to the massive quantitative easing efforts coming from the Bank of Japan, the European Central Bank and the Bank of England as factors driving up the price of U.S. bonds as investors search for yield around the globe.

The U.S. is faring better than other economies such as Japan, which on Monday reported 2Q economic growth of 0.2% – barely anything. Weaker global economies have helped push U.S. stocks to record highs along with U.S. bonds. As bond prices rise, yields have drifted to near-record lows.

“For example, the 10-Year treasury yield at 1.5% is pretty low in an environment where we think we are making progress towards our objectives. We are pretty close to full employment, we think inflation will trend back to 2% over the next couple of years” he explained.

Dudley stressed that the U.S. economy is improving enough that a September rate hike could be possible. He also warned that those investors betting against a rate hike could get burned.

“If you look at futures markets for the federal funds rate, which is the rate that we we target, it has basically one rate hike priced in through the end of 2017 – I find that too low. I think the market is complacent about the need for gradually snugging up short-term interest rates over the next year or so.”