Reuters: Money: Bond bear market to boost Schwab, Ameritrade: UBS

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Bond bear market to boost Schwab, Ameritrade: UBS Mar 16th 2012, 20:40 NEW YORK | Fri Mar 16, 2012 4:40pm EDT NEW YORK (Reuters) - A long-term bear market in bonds is under way as a more durable global economic recovery takes root, investment bank UBS said on Friday, noting that U.S. discount brokerages Charles Schwab and TD Ameritrade stand to benefit from the rising yields. The rock-bottom interest rates of the past few years have cut into the profits that discount brokers like Charles Schwab Corp and TD Ameritrade earn on customer cash balances. Schwab has also waived around $1 billion in money market fund fees in the past two years, as the low rates being paid could result in negative returns to clients if fees were charged. The U.S. Federal Reserve committed to keeping interest rates at historic lows at least through late 2014 to help spur economic growth, according to its statement on Tuesday after its one-day policymaking meeting. The Fed cut its fed funds rate for banks' overnight loans to a range of zero to 0.25 percent in December 2008 and has held it there since. But the improving markets are beginning to challenge that commitment, UBS said in a research note. "And based on the evidence and our forecasts, the Fed will lose the challenge," the investment bank said, adding that it believes a long-term bear market in bonds has begun. BOTTOM-LINE SCENARIOS In a separate note, UBS analyst Alex Kramm said that a trend toward higher yields would have significant implications for Schwab and TD Ameritrade. A 50-basis-point rise in the fed funds rate would increase earnings per share, or EPS, in 2013 at Schwab by 17 cents and at TD Ameritrade by 7 cents, while a 100-basis-point rise would increase 2013 EPS by 50 cents at Schwab and 21 cents at TD Ameritrade, he said. UBS said it does not expect the Fed's policy change soon, but "the trend toward higher yields in the months, quarters and years ahead is established." U.S. Treasuries suffered their worst sell-off in four months this week following a raft of upbeat economic data that has also fueled a rally in U.S. stocks. On Thursday, the Standard & Poor's 500 Index closed above 1,400 for the first time since the 2008 financial crisis. The yield on the benchmark 10-year U.S. Treasury note was at about 2.3 percent, up around 60 basis points since September. Kramm also said that asset managers like T Rowe Price Group would benefit as flows continue to shift out of bonds and into equities, and that the interest-rate businesses of exchange operators NYSE Euronext and CME Group could see heightened demand. UBS acknowledged that an unexpected economic slowdown in the United States or abroad, or an oil supply shock, could derail its forecast. "But we are prepared to eat humble pie because, at this juncture, our conviction is that the bear market call for bonds is right. And it is one of those once-in-a-decade calls," it said. (Reporting by John McCrank; Editing by Jan Paschal) Link this Share this Digg this Email Reprints

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