A 30-Plus-Year Trend in the Bond Market Was Just Broken
Something major just happened in the bond market…
You better watch out for it. It could cause wild fluctuations in your portfolio, even if you don’t own any bonds.
You see, stock investors ignore the bond market, often thinking, “Oh, it doesn’t impact me whatsoever.” It does. More on this later.
But first, know that the bond market has broken above a major downtrend.
Consider the chart below of the yield on the 10-year U.S. bonds. Also, pay very close attention to the lines drawn on the chart.
You see, over the past 30 or so years, the yields on bonds were declining. This was happening because the Federal Reserve was lowering its benchmark interest rates. When the Fed rates go down, bond yields decline.
Chart courtesy of StockCharts.com
Now, to nobody’s surprise, the Federal Reserve is raising rates.
Here’s the thing: The bond market is not really taking it lightly.
Just recently, yields on 10-year U.S. bonds broke above a trend that was in place for 30+ years! This shouldn’t be ignored whatsoever.
So What If a Major Trend Is Broken?
There are few things to keep in mind here.
First, know that we see a major trend breaking in the bond market when the rates set by the Federal Reserve are historically low. The federal funds rate is set at just two percent.
The federal funds rate is expected to go above 3.5% by 2020.
What will happen then?
At its core, the breaking trend says there’s panic in the bond market these days.
Then, keep in mind the most important rule of trend analysis—and it’s coming from a lot of experience as well: A major downtrend breaking results in a robust move to the upside.
So, we could be setting up to see yields surge much higher. 10-year bonds with a yield of five percent don’t look like an out-of-the-world idea at this point.
Lastly, one has to wonder, if yields are soaring, it means interest rates on loans and mortgages could surge as well. How would it impact consumers and businesses in the U.S. economy? Economics 101: A higher interest rate impacts consumption.
Surging yields could be the catalysts for the next economic slowdown in the U.S.
Why Should This Matter to Investors?
The bond market is often ignored by investors because they think it doesn’t impact them at all.
Dear reader, it’s important not to overlook what’s happening in the bond market these days.
Know that bonds are an asset class, just like stocks.
When yields are going higher, it means investors can generate a higher rate of returns by owning bonds. After the financial crisis of 2008-2009, bonds weren’t really providing many returns, so in search for higher returns, investors flocked to the stock market.
Mind you, I am talking about investors who would normally buy bonds mainly. For instance, the pension funds. Consider that at the end of 2017, city and county pension fund portfolios consisted 50% of stocks. Read more here: The Next Stock Market Sell-Off Could Put Retirement on the Line for Many
Now, bonds could be starting to look attractive to investors. The higher the yields go, the more attractive they will look.
With this in mind, understand that we could be seeing investors ditch stocks and other assets in a rush to buy bonds. This could create a lot of volatility, and your portfolio could be on the line.