The bond market barely gets the respect from the financial media it deserves. It’s just not as sexy as the stock market. It lacks the personality of publicly traded stocks and their management. It’s a confusing mix of lingo and financial math.
But the bond market is huge and a key benchmark may hit levels not seen all year in the week ahead.
Pension funds, insurance companies and investors of all sizes buy bonds, relying on a steady stream of income as the IOU is paid back. That’s the interest rate. For buy-and-hold bond investors, that rate is locked into place at the time the bond was purchased. Over the past year, that’s been an incredibly low rate. But it’s been rising. The interest rate on the 10-year U.S. government bond is up one percent since September.
That may not sound like much, but when the bond was earning just 1.5 percent three months ago and now earns 2.5 percent, that’s a big change. Oh yeah, as bond’s interest rate rises, it’s price drops. So the value of that same government bond is near its lowest level of the year. The benchmark 10-year Treasury bond has lost about 9 percent since July while the stock market has rallied more than four percent.
Fueled by Brexit worries and softening economic data at the time, investors bid up prices for bonds over the summer. But since the election, while the stock market has rallied, bond prices have dropped. Two primary reasons are the Federal Reserve first signaling and then actually raising its target interest rate. Also, President-elect Donald Trump campaigned on a platform that included tax cuts and massive spending on defense and infrastructure. That could increase the supply of government bonds in the market.
Rising bond interest rates makes borrowing money more expensive for homebuyers using mortgages, for instance. They may also reflect confidence U.S. economic growth may finally be picking up as the year ends.
Financial journalist Tom Hudson hosts “The Sunshine Economy” on WLRN-FM in Miami. Follow him on Twitter @Hudsonsview.