The Bond Market: Once a Good Investment, Now a Bad One

Risks in the bond market continue to pile up quickly. Bond investors need to be very careful. They need to be very vigilant about their next step.

June was the first month since August of 2011 that U.S. long-term bond mutual funds experienced a net outflow. A total of $60.4 billion was withdrawn from the bond mutual funds in June 2013. (Source: Investment Company Institute, August 14, 2013.) While I don’t have the exact numbers yet, bond investors continued to exit bond mutual funds in July.

Why are investors in the bond market exiting stage left? As yields continue to rise, the price of bonds are falling and investors are taking their losses and moving on. Just look at the chart below of the bellwether 30-year U.S. Treasury bond.

 TYX 30 year t bond yield chart


Chart courtesy of

Since the beginning of May, yields on long-term U.S. bonds have skyrocketed, as the chart above so clearly shows. The yield on the 30-year U.S. bond has gone up from 2.8% in early May to over 3.8% today.

This is very significant, as yields on long-term U.S. bonds—such as the 30-year bonds—are benchmarks for yields across the bond market. If yields on U.S. bonds go higher, you can bet the same for other kinds of bonds in the bond market as well.

Since the beginning of the financial crisis, we saw investors rush to the bond market because it was considered to be a safe place and because they had bet (correctly) that the Federal Reserve would drop interest rates to help the economy. Bond prices increased significantly under the Federal Reserve’s easy monetary policy.

Now, with conflicting signals from the Federal Reserve, the bond market is a fragile place. Bond investors leaving the market shows they don’t have an appetite for holding bonds in their portfolios as they did a few years back.

If interest rates continue to rise, losses in the bond market are going to be immense. Consider this: Pension funds and insurance companies hold bonds in their portfolios. As the yields continue to increase, they are going to face scrutiny.

Those who are saying the recent dip in the bond market is a great buying point should rethink their options. The risk-to-reward ratio is poor for bond investors.

What He Said:

“Prepare for the worst economic period ahead that we have seen in years, my dear reader, as that is what I see coming. I’ve written over the past three years how, in the late 1920s, real estate prices fell first before the stock market and how I felt the same would happen this time. Home prices in the U.S. peaked in 2005 and started falling in 2006. The stock market is following suit here in 2008. Is a depression coming? No. How about a severe deflationary recession? Yes!” Michael Lombardi in Profit Confidential, January 21, 2008. Michael started talking about and predicting the economic catastrophe we started experiencing in 2008 long before anyone else.