IS THERE IS A BUBBLE IN US BONDS?
Today the US Government 10-Year bonds traded at 99.27 and yielded 3.71%. In other words, a bond that had a par value of $1,000 at maturity was currently trading below par at $992.70.
U.S. interest rates currently are historically low. Because of the recession, the Federal Reserve has kept interest rates artificially low in order to stimulate the economy.
One of the mandates of the Federal Reserve is to fight inflation. One tool at their deposal is to increase interest rates.
As the economy recovers and the unemployement numbers decline, the U. S. Federal Reserve will begin to increase interest rates. The moment they begin to do so, the interest rate increases will be frequent and dramatic. The result will be a decrease in the value of the U.S. 10 Years Bonds. It is very possible that the bonds can lose as much as 30% of their value in the next two years.
According to the latest Wall Street survey , most of the new money invested in Wall Street was invested in bond funds. Because of the latest market volatility, many investors feel more secure in the Bond market without any understanding that their losses could be significant. Additionally understand that upon maturity, the bond will be paid their full par value. The question is “do investors want to wait ten years to get their money back” ?