For about 35 years, investors have enjoyed a bull market in bonds. At the start of 1982, the interest rate on 10-year U.S. Treasury bonds was 14.2 percent. By Nov. 1, 2016, interest rates had fallen to 1.8 percent. Since bond prices increase as interest rates fall, U.S. Treasuries (and other types of bonds) have rewarded many investors with attractive total returns during the past few decades.
In the natural course of events, bull markets end and bear markets begin. About six years ago, experts began to caution the bull market would end, interest rates would begin to move higher, and a bear market in bonds would ensue.
Bond guru Bill Gross was one of the first to sound an alarm in his July 2010 commentary. The Federal Reserve’s first round of quantitative easing (QE) – purchasing billions of dollars of mortgage and Treasury bonds – had ended in March 2010, and Gross didn’t yet know the Fed would initiate a second round of QE in November of that year. The action helped keep interest rates low.
As U.S. economic growth strengthened, predictions of rising interest rates resumed. During 2012, The Wharton School’s online business journal published an article titled, “The End of the 30-year Bond Bull Market?” It predicted rates would soon move higher
Low inflation, sluggish economic growth in the United States and abroad, and geopolitical shocks, such as the European debt crisis, continued to support investors’ appetite for bonds and the bull market persisted. It wasn’t until late 2013 the Federal Reserve decided the U.S. economy was strong enough to benefit from less easy monetary policy.
The Fed began to taper its QE program in January 2014 and ended the program in October of the same year. In December 2015, the Fed raised the fed funds rate for the first time in almost a decade. There are many sound reasons to believe interest rates may be headed higher.
During October 2016, bond rates moved higher in Europe and the United States. Yields on 10-year German Bunds, which were offering negative rates (-0.2 percent) in the summer of 2016, rose to 0.172 percent early in November 2016. U.S. Treasury yields moved higher in late October 2016 and then fell as investors grew wary about the outcome of U.S. elections.
It’s too soon to know whether the bond bull market is at an end, but years of speculation – and recent fluctuation in bond values – highlight the importance of having a well-diversified portfolio that is targeted toward your financial objectives. If you’re not sure how to prepare your portfolio for a bear market in bonds, talk with your financial professional.
Securities offered through LPL, Member FINRA/SIPC. Investment advice offered through Private Advisor Group, a registered investment advisor. Private Advisor Group and Antoine Williams & Associates Financial Services are separate entities from LPL Financial. This material was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. Stock investing involves risk including loss of principal.
The information in this material is for general information only and not intended to provide specific advice or recommendations. Consult your financial professional to determine what is appropriate for your situation.