Written by Nathan White, Chief Investment Officer, Paragon Wealth Management
Is this the first move in the long awaited end to the bond bull market or just a short-term blip? Treasury yields shot up yesterday after comments by the Federal Reserve seemed to indicate that since the economy is picking up there would not be a need for another round of bond purchases. Interest rates have been pushed to historic lows due to slow economic growth, central bank purchases, flight to safety moves (i.e., European credit fears), and general investor aversion to equities. Due to these factors the U.S. government has had an easy time financing its large budget deficits which has pushed debt levels up drastically. Eventually these government actions could lead to significant inflation and/or a fiscal crises such as Europe is experiencing which would be significant negatives for bonds.
Massive amounts of investor money has been flowing into bonds and they posted stellar performance last year. Many (including us) have been calling for the end of the 30 year bull market in bonds because with rates at near zero they simply can’t get any lower. The difficult part is trying to call when rates will start moving back up. Over the past 3 years many have placed unprofitable trades trying to time the end of the bond bull market. The idea is right but the timing (as always) is difficult to pull-off. Just because rates are low doesn’t mean that they will jump back up drastically. Many factors (i.e., baby boomers retiring, continued central bank action, credible deficit reduction actions, etc.) could keep a lid on rates for a while to come. Perhaps it will just be a slow inexorable climb. So has the tide started to shift?….stay tuned.
Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.