Bond Market Faces Headwinds: A Lot Of Uncertainty Ahead
The bond market shouldn’t be ignored. It could be heading toward immense trouble, and that may create a lot of uncertainty in the coming months and quarters. You see, investors at times ignore bonds, thinking that the market doesn’t impact them whatsoever. Don’t be one of those investors.
Bonds could be headed for a crash, and that could take a massive toll on investors’ portfolios.
The market has had a massive run to the upside for the last 30+ years. To give you some perspective, look at the chart below. It plots the yields on 10-year U.S. bonds.
Chart courtesy of StockCharts.com
Remember, when yields decline, it means that prices are going higher.
Why did bonds have a rally over the past 30+ years? The U.S. Federal Reserve and other central banks across the globe were lowering their benchmark interest rates. Keep in mind, when interest rates goes down, bond prices increase and yields decline.
Don’t forget, the opposite is true as well; when interest rates go up, bond prices decrease and yields skyrocket.
In 2008–2009, we were faced with a financial crisis and a global economic slowdown. As this was happening, central banks went all in. They dropped their interest rates faster than normal, and this acted as throwing more gas on the fire. It gave a major boost to the bond market.
Central Banks Raising Interest Rates
Fast forward to now. As it stands, we are living in an environment where central banks are raising interest rates. This is mainly because economies are doing fine and, in some cases, inflation is taking a toll.
The Federal Reserve is at the forefront. It’s raising its benchmark interest rates. Consider this: not too long ago, the Federal Reserve had its benchmark rates set at 0.25%. They stand at two percent now and they are expected to be above three percent by 2020.
We are seeing a panic-like scenario in the U.S. bond market especially.
