Bond Markets Fluctuate Based on Rising Interest
At the end of 2021, the 10-year treasury note reached only 1.5 percent, creating low-interest rates. Less than a year later, in October 2022, the rates peaked at more than four percent, which hasn’t been seen since April 2010. These unusual bond market fluctuations force investors to constantly recalibrate to keep up.
Because of the inverse relationship between bond yields and prices, bond issues fall when yields rise. When the demand decreases, bond issuers typically turn to higher yields, which lowers the value of the lower yields already on the market.
Higher interest rates often go hand-in-hand with higher inflation, following long-term growth and trends. An inflation surge between the first quarter of 2021 and mid-2022 saw a Consumer Price Index (CPI) level of 9.1 percent, the highest reading since 1981. Bond markets usually fluctuate based on upcoming financial policy shifts.
Bill Merz, head of capital markets research at U.S. Bank Wealth Management, said, “Bond yields rose in 2022 primarily because the Federal Government pivoted to a much more hawkish position, as investors anticipated aggressive interest rate hikes to rein in inflation.”
An economic downturn can result from issues such as war, supply constraints, and pandemics, all of which have happened in recent history. Since these various events can disrupt the economy, consumer spending often wavers. Interest rates could skyrocket if the economy gets a second wind and accelerates growth. However, long-term yields could fall if the economy takes a downturn.
Let’s get to the point: what does this all mean for bond investors? In short, buying bonds during a high-interest rate period will yield higher results.
Merz said, “We’re putting greater emphasis on core bond holdings. We believe that bonds offer compelling defensive characteristics relative to stocks. Our emphasis is on high-quality investment-grade taxable and municipal bonds as well as a dedicated exposure to short-term U.S. Treasury investments to manage overall risk exposure should interest rates continue to rise in the near term.”
The recent housing market activity has paved the way for a beneficial supply-and-demand balance in the mortgage market.
“This remains a time when investors are likely to benefit from holding more high-quality assets and fewer volatile assets than in a typical period.”
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Written by the digital marketing team at Creative Programs & Systems: https://www.cpsmi.com/