The Outlook for Bonds

Prominent warnings of soaring bond yields, and therefore losses for investors who own bonds, have been pervasive since the end of the global financial crisis in 2009. Perhaps the most famous such prediction came from Nassim Nicholas Taleb, who in 2010 said, “It’s a no brainer, every single human should short U.S. Treasury bonds.” But these prognostications have so far proved wrong, as bond yields have actually fallen. The yield on 10-year Treasury bond is below 2%, not far from its all-time low set in 2012. So when will bond yields actually start to rise and bond investors start to feel the pain?

Topics: Blog Bonds Interest Rates

The Outlook for Inflation

The US inflation rate has been extremely low since 2009, averaging only 1.6% per year. That’s below the Federal Reserve’s target of 2%. But recently Fed Chair Janet Yellen warned of a phenomenon called “pent-up wage deflation”, which is a complicated way of saying that inflationary pressure could suddenly surge as the economy picks up steam. So how much risk is there of a spike in inflation?

Topics: Blog Bonds Inflation Interest Rates Janet Yellen

The Fallout from Argentina’s Default

Last week Argentina defaulted on its debt for the second time in the last decade and a half. That’s not good news for investors who own international bonds, and headlines such as “Argentina’s default could hurt the world” and “Not just Argentina: 11 countries near bankruptcy” suggest that the Argentina’s travails could have a ripple effect around the globe. Despite the ominous headlines, however, the fallout is likely to be minimal.

Topics: Blog Argentina Bonds

How Long Can Bond Yields Stay Low?

Despite numerous predictions that bond yields would soar (and therefore bond prices would fall), yields have actually fallen so far in 2014. After rising from record lows last year, the yield on 10-year US treasury bonds is currently around 2.5%, still far below its typical historical range. How long can bond yields stay so low? The answer is “possibly a very long time” based on the experiences of other countries.

Topics: Treasuries Japan Blog Bonds Yield

Q2 Recap: Stocks and Bonds Both Rise as Low Volatility Reigns

There were plenty of potential triggers that could have sent financial markets into a panic in the second quarter of the year: it was revealed that the economy contracted in the first quarter at an annualized rate of almost 3%, the Federal Reserve continued to scale back its monetary stimulus, and oil prices rose as Iraq was overrun by insurgents. But financial markets shrugged off these developments, and the quarter was characterized by low volatility (few large ups and downs in the markets).

Topics: Blog Stock Market Bonds Volatilty Markets

The Basics of Interest Rate Risk

Unlike with individual stocks, whose values can soar or plunge depending on the latest headlines, the payoffs from investing in bonds tend to be more predictable. Most bonds offer a set of periodic interest payments, with the initial principal returned when the bond matures. But that doesn’t mean that bonds—even bonds issued by the US government—are risk-free. Since (for typical bonds) the payments are set in stone when the bond is first issued, changes in interest rates can dramatically affect how much these payments are worth.

Topics: Blog Risk Bonds Duration Interest Rates

Are Treasury Bonds “Risk-Free”?

The term “risk-free” is often used to describe treasury bonds issued by the US government. Yet in recent years Congress has repeatedly hesitated to raise the legal limit on the amount that the federal government is allowed to borrow, sparking panicked legislative deal-making to keep the government from defaulting on some of its debt. After one of these episodes, in 2011, Standard & Poor’s even lowered its credit rating for the US government. After this political buffoonery, should you still consider treasury bonds to be riskless? The answer is that from an investors’ perspective, treasury bonds were never risk-free.

Topics: Treasuries Blog Risk Bonds Debt Ceiling