What’s Going on With the Bond Market?
” The bond market is screaming .” “ The bond market smells like big problems. This is where to hide. ” Every time you turn around, another headline pops up that sounds exactly like this because bond yields are dropping at an angle close to the height of Splash Mountain. And at the same time, it becomes more expensive to buy bonds. But wait, what about the interest rate? Don’t forget the interest rate.
It’s all connected. But if you’re a budding investor, things get a little more complicated. Let’s take a look at how the bond market works and why there is still a cow on Wall Street.
Bond Basics
When you invest in bonds, you are buying someone’s debt; it can be a debt of a company or a government. Bonds are notorious for being less risky than stocks because in the event of a bankruptcy, debtors are at the top of the list of people who need to get their money back. If the company goes bankrupt and you still have shares in it, you are likely to get buyouts. Government bonds are considered the least risky of all, because the US Treasury has never repaid its debts in its long history .
Bond prices are the opposite of interest rates. In our case, interest rates fell , which led to a rise in bond prices. When bond yields – the return on investment – decrease, it also drives up bond prices. This is because if the bond is more expensive and has a lower interest rate, you will earn less on this investment.
What is happening with the bond market now
In the meantime, you have another government bond wrinkle that I mentioned. Typically, long-term government bonds such as 30-year Treasury bonds, for example, yield higher yields than short-term bonds such as 2-year Treasuries. After all, the longer you invest in something, the more likely it is to make a profit.
But the yield curve for 2-year Treasuries has inverted, which means that short-term government bonds have higher yields – perform better – than long-term government bonds (in this case, 10-year Treasuries). These government bonds form the basis for the rest of the bond market. And the bond market as a whole lays the foundation for the economy as a whole. “The bond market is one of the most powerful factors affecting the economy and the direction of the stock market,” said Riley Adams, a consulting accountant who blogs at Young and The Invested .
And it makes investors nervous, because in the past, an inverted yield curve has indicated an impending recession. Thus, people prepare for an economic downturn by buying up less risky investments. “People are becoming less risk averse and want some return on their investments,” Adams said. “More and more investors are shifting their money from other bond investment options, and this demand raises the price of bonds and lowers interest rates.”
The economy is not doomed (yet)
Talk of a recession is not new. The 3-month Treasury yield curve inverted with the 10-year yield in March for the first time since 2007. According to Jeff Brown, president of Brown Wealth Management , the stock market saw a red flag and pulled back a bit.
“The market is still growing,” Brown said. “At the moment, stocks and bonds are still growing. For the average investor, you probably don’t need to do anything. ” If volatility persists, it might make sense to buy shorter-term bonds or stocks, he said.
For now, this comes back to diversification – diversified investment, so you don’t rely too much on one type. If you “watch these daily or weekly or any other frequency fluctuations in the market and feel uncomfortable with these changes because they directly affect your portfolio, it may mean that you are at too much risk,” he said. Adams. “It is always important to be diversified and to make sure that any investment decisions you make are in the best possible way for the financial goals you are trying to achieve.”