Daily Local News (West Chester, PA)
The bond market
Why it’s so high: Since the 2008 financial crisis, the Federal Reserve and other central banks around the world have reached deep into their toolbox to support markets. The Fed, for example, owns $4.5 trillion in Treasurys, mortgagebacked securities and other investments. With central banks hoovering up so many of the world’s available bonds, prices have been high.
This year, many analysts expected bond prices to drop in tandem with a rise in interest rates. When rates climb, newly issued bonds pay more in interest and make the lower yields paid by older bonds less attractive. With expectations for the economy to improve, inflation to tick higher and the Fed to continue raising short-term interest rates, the general call at the start of the year was for rates to rise.
The opposite happened. Economic growth has remained sluggish, and the yield on the 10-year Treasury is at 2.13 percent after starting the year at 2.47 percent. That drop in rates has pushed up prices for bonds, and the most common type of bond fund has returned 2.7 percent this year, more than it has in two of the last five full years.
What could trip it up: A rise in rates, which many Wall Street watchers still expect to happen. Economic growth may still be only modest, but the job market has improved, and the Federal Reserve is itchy to pull rates further from their record lows.
The Fed raised shortterm rates Wednesday, the third time it’s done that since December. It also said it plans to start paring its bond investments later this year. Other central banks around the world aren’t yet pulling back on stimulus. But when they do, the pullback in stimulus would mean fewer dollars chasing after bonds, and the fear is that could lead to a cascade of pressure pushing down on prices across different investments.
“My worry is more about the bond market than it is in the equity market,” said Wells Fargo’s Hartman. “The good times are rolling, but I worry that at some point it has to end.”