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

When Will the Fed Start to Raise Interest Rates?

The US economy has perked up recently: an average of almost 250,000 jobs have been added per month so far this year, a substantially faster pace than any other year in the past decade. As a result, the Federal Reserve has shifted its focus away from trying to stimulate the economy and toward potentially raising interest rates. Raising rates would have some impact on essentially every investment, affecting bond prices, stock valuations, the general economic outlook, and even the how much interest your bank pays on savings accounts.

Topics: Blog 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 Outlook for High Yield Bonds

High yield bonds have done well since the end of the global financial crisis, providing positive returns of at least 5% every calendar year since 2009. This performance has largely been driven by an improving economic outlook combined with low (and generally declining) interest rates. As the Federal Reserve cuts back on its attempts to stimulate the economy and gets closer to raising interest rates, are the good times coming to an end for this asset class?

Topics: Blog Interest Rates High Yield Bonds

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