Investors Bound for Shock If Rising Rates Sink Bonds, Cohen Says

By Christopher Palmeri
Bloomberg
Apr. 25, 2011

Investors who poured more than half a trillion dollars into bond mutual funds since 2007 will experience a market crash when interest rates rise, according to Marilyn Cohen, a Los Angeles money manager.

Cohen lays out a grim scenario in “Surviving the Bond Bear Market” (John Wiley & Sons Inc.), co-written with husband Chris Malburg. Rates will surge if the global economy strengthens or because investors lose faith in governments with growing deficits, said Cohen, whose book came out this month. Standard & Poor’s this week put a “negative” outlook on U.S. credit, citing the risk that leaders will fail to curb debt.

“The baby boomers, who really have been all-in to all kinds of bonds and bond funds since the end of the credit crisis, they’ve never lived through a bear market with skin in the game,” Cohen said in a telephone interview. “It’ll freak people out.” [...]

At worst, China “will stop buying U.S. Treasuries,” Cohen wrote. “At best they will drastically reduce their purchases. Either way, the consequences will be the largest interest-rate hikes in history.”

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