Bond

bears have a powerful ally in their corner: the U.S. Federal Reserve .

While the Fed’s zero-interest rate policy has kept Treasury bond prices buoyant, its long-term priorities are working against fixed income. Its Operation Twist is designed to keep a lid on long-term rates, encouraging investors to embrace riskier assets than bonds. Quantitative easing , meanwhile, should weaken the U.S. dollar and ultimately ignite inflation .

“Once started, inflation is very difficult to stop quickly,’’ says Scott Colyer, chief investment officer of Advisors Asset Management in Monument, Colo. “Rising inflation would tend to produce higher interest rates and lower bond prices.”

When rates rise, long-term bonds typically suffer the greatest price declines because the longer timeline means greater uncertainty and vulnerability. This group includes 10-year and longer U.S. Treasurys, as well as investment-grade corporate bonds.

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