Bondholders Beware

The bond market has had a 30 year bull market run. These bull runs are hard to find and seldom last. One that has lasted this long might never be seen again. It looks like things will turn around in the next couple of years. I have been saying that bonds will be the first thing to take a hit when the economy recovers. As the economy has been gaining steam, yields have been inching up. As we all know, when yields rise, bond prices fall. The Fed has given a time frame for rates to remain artificially low. The question is whether these rates can actually be sustained for the next two years.

Yields could soar if the Fed prematurely came out and raised rates. Bondholders would be crushed as the bottom would fall out among prices. I don’t foresee a quick change in monetary policy as the Fed is consistently quoting 2014 as the earliest year to possibly raise rates. Should the economy or inflation force the Fed to show its hand early, bondholders beware. Even still, Treasuries remain one of the safest places to hide as the economy struggles to provide consistently good news.