Yardeni: Small-Cap Exodus Won’t Stall S&P 500

September 30, 2014

ETF.com: Let's talk about fixed income. How are you advocating investing in fixed income, looking ahead in 2015?
Yardeni: My advice has been that if you bought the bonds right, don't sell them. My view is we're going to have 10-year Treasurys trading between 2.5 and 3 percent for the end of this year, and well into next year. If the Fed does tighten, we'll probably see 3 percent on the bonds, and I think could pretty quickly have an adverse effect on some areas of the economy like the housing market.

But I don't see an inflation problem. I see the U.S. economy growing moderately, with the overseas economy remaining very weak. What makes U.S. bonds look still attractive is in comparison to yields in Japan and Germany, where yields are 1 percent or less.

As long as the global economy continues to look weak, anybody who bought bonds right with a good coupon should just clip the coupon and relax.

ETF.com: In our previous conversations, you preferred corporates over Treasurys. Does that still hold true?
Yardeni: That still makes sense. It's not a hard conviction. In other words, I think you'd do well in both. But if you're buying bonds now, it's better to buy the corporates. I recognize that the main disadvantage of corporates is they're not as liquid as Treasurys. But if you're going to buy them, you've got to be happy with the coupon and stick with it, because if in fact we ever do get a significant backup in bond yields, it could be very difficult to sell the corporates.

To the extent liquidity is an important issue, then Treasurys are actually a better place to be because if you do want to get out, you'll be able to get out fairly quickly. While in corporates, it's going to be much tougher.

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