What is next for interest rates?

With a bad month for equities, one of the natural questions is what will be the direction of interest rates. Should bonds be used as a hedge for equity positions or should you view it as a stand alone investment?

The long history of interest rates in the US tells us that you would be hard pressed to believe that rates can stay low. The priors let us to be careful. History is against holding bonds. 

The more recent history tells a divergence story between maturities. The taper tantrum caused a general increase in rates, but then we had a big divergence in rate behavior. The forward guidance talk of continued low rates through the next year brought short-rates down but caused long rates to move higher. 2-year constant maturity rates have moved higher but not to the same degree as the 10-year. Since the 2-year rate is the combination of expected short rates, there is a clear view that rates will be going up quickly after 2014. Under current environment, there is little reason to hold fixed income. Of course, we are subject to the whims of central bankers but the odds are against you right now.