The Bond Market is Struggling
CAMS Weekly View from the Corner – Week ending 2/19/21
February 22, 2021
In our first edition for 2021, we offered a general thought experiment asking how the Treasury bond market would handle the on-going and expected near-future increased indebtedness coming from D.C. policies. In addition, with the money printing occurring as well as expected printing to come to aid in financing the indebtedness would the follow-on general price inflation add a double challenge to the Treasury bond market? General price inflation is a primary enemy of fixed income investments such as bonds. Inter-market wise, our curiosity was and is based in how the stock market at large will handle interest rates rising resulting from Treasury bonds going lower in price and thereby watching important market based interest rates rising. Here six weeks later from our initial 2021 edition it seems we will begin to see how the various markets handle one another as Treasury bond prices are falling and hence their interest rates are rising. Simultaneously, general price inflation has picked up and commodity price inflation has been on an upward trend. The above general economic landscape is an ugly recipe for bond market participants and they have taken note via the downward price action developing in the bond market generally.
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Above are two charts to underline the pricing behavior in the bond market. Both are depicting various maturities within the Treasury bond market. The first chart is for Treasury bond prices greater than 20 years maturity and the second chart depicts Treasury bond prices for maturities between 7-10 years. The red downtrend line highlights the price behavior across the spectrum of Treasury maturities since the beginning of 2021. With this behavior, as stated above, interest rates are rising as these prices trend lower. This is also the case for bond prices outside of the Treasury landscape as Investment Grade Corporate bonds are now trending downward as well with resulting higher interest rates. In terms of the stock market this may lead to a shift away from growth category companies and more toward value category companies as we see some evidence of this beginning. There is a wealth of other stock market tributaries this can lead to but keeping it in a general theme here; as rates rise they can place pressure on stocks. IF upside rates get out-of-hand to the upside they will certainly place downside pressure on stocks. We are watching numerous inter-market behaviors closely and will share as things develop. For now, the bond market is certainly struggling as prices throughout maturities and bond classes are trending downward. I wish you well…
Director, Market Research & Portfolio Analysis
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