Well, it’s starting to happen…… December 15, 2010
Posted by forwardfinancialplanning1 in Bond Index Funds, Bond Mutual Funds, Economic Conditions, Income Taxes, Long Term Bond Funds, Short Term Bond Funds.add a comment
Several postings on this site have commented on the huge investment inflows into bonds and bond mutual funds during the past two years. These cash flows coincided with a historic decline in bond yields to levels not seen since the Great Depression. Since bond prices move inversely to yields, bond prices increased and it’s easy to surmise that the substantial cash inflows into bonds represent “performance chasing”. As investment history has proven time and time again, performance chasing usually ends badly.
The inevitable downfall may have begun. The tax compromise in Washington seems to have awakened the “bond vigilantes” to the fact that the economy will most likely continue to improve. This, of course, will cause the Fed to end its inordinately accomodating monetary policy, and result in rising interest rates.
This seems to have started in the past month. The yield on 10 year Treasury Bonds has risen from 2.4% in mid-October to 3.36% this week. As expected, the Vanguard Total Bond Market Fund (which tracks the Barclays Aggregate Bond Index) has fallen 3.4% in price (not including reinvested dividends) since November 4. To put this decline in perspective, the price drop equals more than an entire year’s interest yield. With the spector of inflation looming somewhere down the road, it will be interesting to watch how long this trend persists.
