A Bond Market Doomsday – Part 1

 Eye-catching headlines like this are great ratings boosters right now.  Phrases like “Surviving financial annihilation” or “Devastating losses” have been en vogue lately because investors are becoming more aware that bonds may not be the pillar of our portfolios as we have come to rely on them over the past 30 years.  Yields on bonds have been kept artificially low due to the Federal Reserve’s intervention over the past several years with the Quantitative Easing (QE) programs.  However, now that it looks as though the FED will be backing off of their QE programs, since it looks like the economy will be able to stand on its own two legs, we are left with a bond market with yields at nearly all-time lows

Does this mean that the bond bear is finally out of hibernation? 

The chart below gives us a history lesson on the last time we headed into a bond bear market (early 1950’s).  Rates on the 10-Year U.S. Treasury bond were at similar levels to where they are today.

From what we have seen already this year, it does seem that rates have nowhere to go but up.  According to the above chart, it will be important to temper our return expectations coming from this bond portion of a portfolio.  The average return we have come to expect from bonds will likely be drastically reduced going forward.  If expectations are properly tempered, this need not “annihilate” our portfolios going forward.  In my next blog I will go into more detail of what a bond bear market has looked like in the past.

Angela Palacios, CFP®is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well asinvestment updates at The Center.

The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. The information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc., and not necessarily of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise.