Over the past six years, the Federal Reserve has been the major driver of the bonds market, snapping up $3.5 trillion in bonds. Thanks to the Federal Reserve and a number of other factors, investors are getting nervous and selling. In fact, they’re selling so much so that 10-year U.S. notes yields increased 40% since February.
On May 15, the U.S. government added to the debt supply. U.S. benchmark 10-year bonds yielded 2.26%—the highest since November of last year.
Bond Market Much More Complex Than It Looks
The reasons for the recent sell-off in the U.S. bonds market are many: Greek debt talk; a weakening U.S. dollar; oil prices hovering around $60.00 a barrel; increased inflation expectation in the eurozone; and increased borrowing costs in the eurozone.
All of this has helped fuel the big sell-off in the bond market. And investors are shell-shocked. When bond yields are this low, the current low coupon cannot compensate for the drop in price.
Victims of the Bond Market
The Federal Reserve, which has backed the U.S. bond market for the last six years, ceased buying bonds back in November, citing the recovery of the U.S. labor market.
Consequently, the selling in global and U.S bond market has accelerated. The bond sell-off should be taken seriously since the bond market is significantly bigger than the equity market.
Low market liquidity caused by the Federal Reserve and European central bank buying bonds is said to be behind the sell-off. Fixed income funds rely significantly on the bond market. And now that it has tanked, they face severe losses.
Bond Investors to Face More Losses
I am afraid that a falling bond market will become a crashing bond market. And that will have a massive negative impact on the equity market. This could eventually impact the whole global economy.