Prices are falling and yields rising as the bond world sends a message to Washington. The fallout will affect retirement savings, mortgage rates, stocks, gold and more.
It's a bond rout.
Understanding bond prices and yields
It's not just happening to U.S. Treasurys. Bond prices are plunging and yields soaring for developed-economy bonds across the globe. In that same one-month period, yields on German 10-year bonds are up 0.62 percentage point, yields on 10-year U.K. bonds are up 0.53 percentage point, and yields on Japanese 10-year bonds are up 0.29 percentage point.Msn.Video.createWidget('PlayerAd1Container', 'PlayerAd', 300, 213, {"configCsid": "MSNmoney", "configName": "player-money-articles-16x9", "player.vcq": "videoByUuids.aspx?uuids=23f81a11-572f-42a5-9cd9-5a6641075c81,ab8440ed-f5f2-4493-84b9-f7529fae4d81,4cdcfdcf-d210-45d6-aa6b-dea28a7af239,c9da3e76-b6e1-4ae7-8118-673926ace00e,c61f4675-69fd-48bb-a7ee-1e416a98d70c,35423c00-cc14-48b7-b0f8-ba51bcddb783,7b3591f1-90c2-4faf-b380-c93a2b6dcdac,f4ff7c70-d32e-485f-a557-ca74224cc6ce,194e420d-121a-4368-a349-a761b217face", "player.fr": "iv2_en-us_money_article_16x9-JubaksJournal-10-reasons-the-bond-crunch-matters"}, 'PlayerAd1');Msn.Video.createWidget('Gallery4Container', 'Gallery', 304, 150, {"configCsid": "MSNmoney", "configName": "gallery-money-articles", "gallery.linkbackLocation": "bottom_left", "gallery.numColsGrid": "3", "gallery.categoryRequests": "videoByUuids.aspx?uuids=23f81a11-572f-42a5-9cd9-5a6641075c81,ab8440ed-f5f2-4493-84b9-f7529fae4d81,4cdcfdcf-d210-45d6-aa6b-dea28a7af239,c9da3e76-b6e1-4ae7-8118-673926ace00e,c61f4675-69fd-48bb-a7ee-1e416a98d70c,35423c00-cc14-48b7-b0f8-ba51bcddb783,7b3591f1-90c2-4faf-b380-c93a2b6dcdac,f4ff7c70-d32e-485f-a557-ca74224cc6ce,194e420d-121a-4368-a349-a761b217face;videoByTag.aspx%3Ftag%3Dmoney_dispatch%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1;videoByTag.aspx%3Ftag%3Dbest%2520of%2520money%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1"}, 'Gallery4');But unless you've got part of your 401k stashed in an international bond fund, what you care about are U.S. bond prices and yields. And you should. The drop in bond prices means a climb in interest rates that will affect everything from your retirement planning to your mortgage.
Let's start with the why of this big bond market move, then move to the why you should care.What ails the bond market The reasons for the move up in yields -- and down on prices -- on U.S. Treasury bonds are pretty simple.
First, the fundamentals. The Federal Reserve is dumping an additional $600 billion in cash on the U.S. economy through its program of Treasury buying. The proposed package for extending the Bush administration tax cuts would throw an additional $1 trillion at the economy. Even though these aren't particularly efficient forms of stimulus, that much money will increase U.S. economic growth.
On Dec. 9, Pacific Investment Management or Pimco, which manages the world's largest bond fund, raised its growth forecast for the U.S. economy in 2011 to 3% to 3.5%. That's up from a previous forecast of 2% to 2.5% for the year.
Increased economic growth usually leads to more inflation. And if inflation is going up, bond buyers want a higher yield before they buy -- to balance out the larger bite that inflation will take out of their interest payments and capital. And if yields are to go up, bond prices must go down.
Second, the psychology.
The proposal from the Obama White House and Congressional Republicans to add $1 trillion in debt over the next two years to the U.S. balance sheet by extending the Bush tax cuts has just put a capstone to the feeling that the U.S. government doesn't have an inkling of a plan for dealing with the U.S. deficit. And worse, because most bond investors were convinced of that before the deal was announced, the markets now believe that nobody in Washington cares. Take the heat to restore fiscal sanity? You can hear the laughter all the way out to the Lincoln Memorial. (See my post on the proposed deal, "Wall Street economists score the tax deal: $1 trillion in costs to get 0.5% increase in GDP growth in 2011.")
Why would anyone want to buy U.S. Treasurys when the United States seems committed to fiscal irresponsibility, a debased currency and as much inflation as necessary to make the huge U.S. debt load as easy to repay as possible?
None of this means that Treasury prices are about to fall off a cliff or that U.S. interest rates are about to zoom to 5% on the 10-year Treasury. The most recent bull market in Treasurys lasted 25 years, and there's no reason to think that a bear market in Treasurys wouldn't take that long to unfold.
The current rout doesn't mean there won't be up days -- Treasury prices rallied slightly on Dec. 9, for example, before falling again on Dec. 10. There's enough worry about bonds from other countries to make Treasurys look like a real bargain on some days. It wouldn't take much of an increase in the temperature of the euro debt crisis to send money out of German bonds and into the seeming safety of Treasurys. (For an example of how volatile bond markets can be, see my post "Relief rally takes hold ahead of the European Central Bank meeting; will the bank rain cash on the markets?")
But I think you can count on the trend now moving toward higher interest rates in the United States no matter what the Federal Reserve does to the short-term rates that are currently locked near zero. Short of a double-dip recession, all that's uncertain is the speed with which bond prices will fall and interest rates will rise.
Continued: Why you should careMore from MSN Money and MoneyShow.com
Tax deal says we're deadbeatsJubak on video: Fed facing difficult new dilemmaThe new market norm: VolatilityJubak on video: The worst job in America is . . .Running from emerging opportunitiesHow US cities/states caused muni bond meltdown1 | 2 | next >
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The funniest thing is, has there been any news of big manufacturing plants opening and hiring, has there been a true surge in hiring, "You really can not count a boost in hiring after October, because generally it is seasonal hiring, and there will be lay-offs come January" the overall big picture from a employment and manufacturing perspective has not changed add to that more and more soldiers returning from deployment looking for jobs, many of which have just been added to the unemployment rolls, and to me the out look is status quo at best.
0 0ReportSpamJoetrader213 minutes agoWith unemployment moving up I find it hard to agree with the economy growing like Pimco says. Others at Pimco are predicting 1.5-2.0 percent growth next year. Clearly not a level that will drop unemployment or cut foreclosures. I guess we will know at the end of next year. My vote is for a sideways market for the year but a down market through the spring. 0 0ReportSpamhavasu4614 minutes agoDah, the Fed's buying $700b in the next 6 moths, the Congress is getting ready to approve $700b more borrowing in the next 12-24 months and rates are normalizing upward. Good, home buyers better think about buying in next 3-9 months else rising rates will negate any further price decline. Investors better get out of bonds into blue chips with yields and start calculating when to move portion into fixed yields. Isn't that the way a normal economy functions?
0 0ReportSpamWiggleJam18 minutes agoAll the Tax deal does is continue the economy "as is" it really does nothing to stimulate the economy, because the money people are getting in their pay checks via "Bush" tax cuts is being spent in the current economy. The unemployment extensions are for 13 weeks and for those unemployed that have not yet reached 99 weeks of unemployment. Supposedly there are several million unemployed that have are or about to lose benefits hat have reached the 99 week threshold, that will not get a extension. The unemployment benefits are extended for 13 weeks, which puts you at April 2011, when once again the unemployment will run out. I guess they figure by that time many will get their Income Tax checks with the big "Earned Income Credits" it is really ridiculous how these people are getting "BIG" 6,7,8, thousand dollar tax returns and have not paid even say $2500 in income tax. You have people making 10K paying little to no income tax getting Earned income checks of $3500.
In many ways I think the talk of a slow economy is B.S. politics. The past two weeks I have been from Chatanooga TN, down to New Orleans, Memphis, and Branson MO, and there is no shortage of people out eating, drinking, and spending money. Think about it, we are in the middle of football season how many college games for major teams have you seen complaining, because they are not selling out. There are still waiting lists for tickets for many NFL teams. If the economy is as bad as the media puts it, people can not afford to go to sporting events where the average cost of a ticket is $85 and by the time you include parking and concessions a person can spend the average of $125 per person so say a family of 4 would spend $400-500 just to attend one NFL or College football game. It is once again BOWL season, and you see all the outrageous prices pay for a ticket to see their team in the big BCS game. There are people out here easily paying $1500 plus for a ticket, or $3000-4000 for a travel package, so tell me how bad can the economy be when you have people out here spending money like that on something as un necessary as a football game.
0 0ReportSpamDelmar Fairchild (DelofBarron) 2 hours agosssp810:
Yes, the tax rate does stay the same, but that is the point. With it you get to keep the money you did last year, without it, the government keeps the money you had last year. Who in their right minds would want to give the government anything? Whatever they touch seems to turn to rot and is wasted.
The bill should not pass at this time regardless of the consequences. Giving billions to the unemployed without paying for it up front is not fiscally responsible. No one wants to see people not have money, but there are some jobs out there that could be had. Unfortunately they pay less than the Unemployment benefits. But they are jobs that get the workers moving again.
The Bush Tax cut bill should lapse and in January, a straight up or down vote should be taken on a similar bill again.
Then a straight up or down vote can be taken on the unemployment funds, only if there is money taken from some other wasted source to pay for it. Both can then we made retroactive to Jan 1st. and not affect anyone's taxes nor unemployment insurance.
By combining the two, the President is playing politics to serve his leftist base, whereas he should be balancing our spending without killing the American worker and companies through higher taxes.
The President complained that the Republicans always say no to what the 2008 elections mandated. Now he won't come to the middle to do what the 2010 elections mandated. Turn around is fair play.
0 0ReportSpamLarry3 hours agoTypical. Blame the deficit on the tax rates. I respected you Mr Jubak, until now. If you are up to your eyeballs in dept, what is the first thing you do??? You cut spending.
The tax cut deal was in fact bad for us .. but only because it included unfunded spending.
0 1ReportSpamvanhalen not vanhagar4 hours agoIn today's rigged markets you must stay diversified and not over allocate to any one area. If you do you will get screwed. Keep cash on the side in excess of what you need and pray. Oh and email your corrupt government.LOL
0 0ReportSpamdisillusioned1014 hours agoJim, another great article. I’m not sure I agree with number 8. The mechanism description seems correct, but historically when the bond market takes control away from the Fed, the Fed usually sets interest rates as a trailing indicator. Kind of like someone being dragged kicking and screaming behind a horse.
0 0ReportSpamLostOnEarth4 hours ago 0 1ReportSpamdisillusioned1015 hours agoThe party of no is like a 16 year old girl who’s parents let the boy friend spend the night. She says no to doing her homework. She says no to giving her parent’s credit card back. However, she does say yes to a moment of pleasure that could have long ranging implications for the next two decades.
The party of no is the party of irresponsibility. My question to the Tea Party is why do you let the boy friend spend the night when you are old enough to know better?
1 2ReportSpamDelmar Fairchild (DelofBarron) 5 hours agoMr. Jubak,
Thank you for writing a clear synopsis of the Bond Market. This type of investment is hard for some to wrap their heads around, but you have made it a whole lot easier to understand.
Now we know why the politicians in Washington are having such a difficult time bringing down the deficit. They are scared they won't get re-elected. In my book, if they reduce the deficit with hard core cuts in the pork we give out, as hard as it may be, I would most certainly vote for their return. If they just allow taxes to rise on everyone and to devalue our money hoping foreign investors will come to our rescue, then they won't get my vote. When you give money away through poor political management like giving money out to home buyers that can't possibly pay it back, the government can not expect the American people or foreign investors to bail them out. It is ridiculous to have given all this new money out thereby reducing its worth to zero. Our country is better than that and our President and other politicians should be ashamed. Maybe the Government should stay out of the banking business. Do we need the Fed?
2 0ReportSpamSomeone (Lee_MA) 5 hours agoWith the possibility of the extension of the Bush Tax Cuts the bond market takes a dive. This is interesting, I was under the impression that everyone was concerned about higher interest and inflation. But, I guess extending tax cuts to the rich and famous is more important to the repubs. 0 0ReportSpamsssp8107 hours agoWHY DOES EVERYONE SLANT THE TRUTH AND CALL THIS A TAX CUT? With exception to the one year payroll tax reduction, TAXES STAY THE SAME! (as well as unemployment insurance). This article paints it as "adding" to the deficit. The truth is it was already built-in, nothing has changed. The point is the bond market rallied with the current tax law in place, so treating it as a "change" and linking it to the recent and future bond market decline has zero creditability. Quit slanting the truth to match what you want to say anyway!!! 4 2ReportSpam85mfe10 hours agoWere all the funds removed from the Social Security Lockbox indexed to inflation? The article puts it all out there, like an automobile about to strike a solid brick wall,,, in slow motion. "I want to be in america, everything free in america..." The U.S. lifestyle exists on borrowed money, that is just the way it is. A wheelbarrow merchant might be a very good occupation in the near future. 0 0ReportSpamGas Guzzlers12 hours agoWhere is ALCOA in your JUBAX? Jim do you really think that aluminium will remain stuck at $1 a pound indefintely? It is a no brainer to buy ALCOA , now it is more like a coma to buy it...
0 0ReportSpamdendl16 hours agoMr. Jubak & Readers,
I find two potential errors with your approach and stance.
First) Hurling another $trillion at the economy thru increased liquidity does not necessarily add GDP. Those funds might wind up in investments like right back in bonds, or metals, commodities, or even stocks. There are seventeen financial institutions who are rewarded with these stimulus funds. Who's to say what they may do with these funds - like shore up stock prices!
Second) How do you know what that the bond market may actually be on the edge of a deep precipice? Do you remember 1980 and 1981 when all the talk was that bond prices had stabilized. Why the drop in prices then seemed like Armeggedon. There are so many bonds out there, who knows how fast prices could be devastated. Then big spreads, lack of liquidity, etc. There are many reasons to fear.
Chad in CO
0 0ReportSpamRussell (Yuansomemore) 16 hours agoTo me, it's a complicated reckoning of an economy that creates no tangible value. Tangible value is created on the manufacturing floor, laboratory, or farmer's field. It's something that can be delivered, it's not just paper to be traded. Jim, how much longer do we have to wait for an American manufacturing renaissance? When and where would we find the investment opportunities along this line of thought?Great article. I'll have to read it a few more times to fully understand it. It is appreciated. 0 0ReportSpamAdd a commentReportPlease help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of ConductPlease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.CategoriesSpamChild pornography or exploitationProfanity, vulgarity or obscenityCopyright infringementHarassment or threatThreats of suicideOtherAdditional comments(optional) 100 character limitAre you sure you want to delete this comment? var initData = {"partnerId":"54bd59b2-6179-4753-ac3f-009a75d55388","jsUrl":null,"strings":{"lc_shw":"true","lc_dtf":"%M/dd/yyyy %h:mm tt","lc_dtf2":"ddd %h:mm tt","lc_gmt":"-5","lc_erg":"Comments are currently unavailable. Try again later.","lc_det":"Comments are unavailable on this page.","lc_pgf":"{0} of {1}","lc_1ach":"Comment","lc_ach":"Comments","lc_newm":"Newest","lc_oldm":"Oldest","lc_bestm":"Best","lc_worstm":"Worst","lc_mixedm":"Controversial","lc_prv":"Previous page","lc_nxt":"Next page","lc_pageNumTooltip":"Enter a page number, and then press the Enter key","lc_first":"First page","lc_last":"Last page","lc_rpl":"Reply","lc_rbs":"Report","lc_edt":"Edit","lc_del":"Delete","lc_pstthanks":"Thanks for posting to","lc_pstand":"{0} and {1}","lc_seemore":"See more . . . ","lc_seeless":"See less . . .","lc_rpttxt":"Thank you for reporting.","lc_msg2mod":"Send note to moderator . . .","lc_cc0":"Please help us to maintain a healLet's start with the why of this big bond market move, then move to the why you should care.What ails the bond market The reasons for the move up in yields -- and down on prices -- on U.S. Treasury bonds are pretty simple.
First, the fundamentals. The Federal Reserve is dumping an additional $600 billion in cash on the U.S. economy through its program of Treasury buying. The proposed package for extending the Bush administration tax cuts would throw an additional $1 trillion at the economy. Even though these aren't particularly efficient forms of stimulus, that much money will increase U.S. economic growth.
On Dec. 9, Pacific Investment Management or Pimco, which manages the world's largest bond fund, raised its growth forecast for the U.S. economy in 2011 to 3% to 3.5%. That's up from a previous forecast of 2% to 2.5% for the year.
Increased economic growth usually leads to more inflation. And if inflation is going up, bond buyers want a higher yield before they buy -- to balance out the larger bite that inflation will take out of their interest payments and capital. And if yields are to go up, bond prices must go down.
Second, the psychology.
The proposal from the Obama White House and Congressional Republicans to add $1 trillion in debt over the next two years to the U.S. balance sheet by extending the Bush tax cuts has just put a capstone to the feeling that the U.S. government doesn't have an inkling of a plan for dealing with the U.S. deficit. And worse, because most bond investors were convinced of that before the deal was announced, the markets now believe that nobody in Washington cares. Take the heat to restore fiscal sanity? You can hear the laughter all the way out to the Lincoln Memorial. (See my post on the proposed deal, "Wall Street economists score the tax deal: $1 trillion in costs to get 0.5% increase in GDP growth in 2011.")
Why would anyone want to buy U.S. Treasurys when the United States seems committed to fiscal irresponsibility, a debased currency and as much inflation as necessary to make the huge U.S. debt load as easy to repay as possible?
None of this means that Treasury prices are about to fall off a cliff or that U.S. interest rates are about to zoom to 5% on the 10-year Treasury. The most recent bull market in Treasurys lasted 25 years, and there's no reason to think that a bear market in Treasurys wouldn't take that long to unfold.
The current rout doesn't mean there won't be up days -- Treasury prices rallied slightly on Dec. 9, for example, before falling again on Dec. 10. There's enough worry about bonds from other countries to make Treasurys look like a real bargain on some days. It wouldn't take much of an increase in the temperature of the euro debt crisis to send money out of German bonds and into the seeming safety of Treasurys. (For an example of how volatile bond markets can be, see my post "Relief rally takes hold ahead of the European Central Bank meeting; will the bank rain cash on the markets?")
But I think you can count on the trend now moving toward higher interest rates in the United States no matter what the Federal Reserve does to the short-term rates that are currently locked near zero. Short of a double-dip recession, all that's uncertain is the speed with which bond prices will fall and interest rates will rise.
Continued: Why you should careMore from MSN Money and MoneyShow.com
1 | 2 | next >
Check out Jim's top stocks for the next 12 months.
Read how to invest with Jubak's showcase portfolio.
Follow the long-term portfolio from Jim's book "The Jubak Picks."
See Jim's new portfolio to help navigate the treacherous interest-rate environment.
Most of what you hear is the same old "Feel Good" spin they put out every year during the holiday season. They want people to feel like they and the economy is doing better than it actually is, that way people will go to the mall and spend money they really can not afford to spend.
The funniest thing is, has there been any news of big manufacturing plants opening and hiring, has there been a true surge in hiring, "You really can not count a boost in hiring after October, because generally it is seasonal hiring, and there will be lay-offs come January" the overall big picture from a employment and manufacturing perspective has not changed add to that more and more soldiers returning from deployment looking for jobs, many of which have just been added to the unemployment rolls, and to me the out look is status quo at best.
Dah, the Fed's buying $700b in the next 6 moths, the Congress is getting ready to approve $700b more borrowing in the next 12-24 months and rates are normalizing upward. Good, home buyers better think about buying in next 3-9 months else rising rates will negate any further price decline. Investors better get out of bonds into blue chips with yields and start calculating when to move portion into fixed yields. Isn't that the way a normal economy functions?
All the Tax deal does is continue the economy "as is" it really does nothing to stimulate the economy, because the money people are getting in their pay checks via "Bush" tax cuts is being spent in the current economy. The unemployment extensions are for 13 weeks and for those unemployed that have not yet reached 99 weeks of unemployment. Supposedly there are several million unemployed that have are or about to lose benefits hat have reached the 99 week threshold, that will not get a extension. The unemployment benefits are extended for 13 weeks, which puts you at April 2011, when once again the unemployment will run out. I guess they figure by that time many will get their Income Tax checks with the big "Earned Income Credits" it is really ridiculous how these people are getting "BIG" 6,7,8, thousand dollar tax returns and have not paid even say $2500 in income tax. You have people making 10K paying little to no income tax getting Earned income checks of $3500.
In many ways I think the talk of a slow economy is B.S. politics. The past two weeks I have been from Chatanooga TN, down to New Orleans, Memphis, and Branson MO, and there is no shortage of people out eating, drinking, and spending money. Think about it, we are in the middle of football season how many college games for major teams have you seen complaining, because they are not selling out. There are still waiting lists for tickets for many NFL teams. If the economy is as bad as the media puts it, people can not afford to go to sporting events where the average cost of a ticket is $85 and by the time you include parking and concessions a person can spend the average of $125 per person so say a family of 4 would spend $400-500 just to attend one NFL or College football game. It is once again BOWL season, and you see all the outrageous prices pay for a ticket to see their team in the big BCS game. There are people out here easily paying $1500 plus for a ticket, or $3000-4000 for a travel package, so tell me how bad can the economy be when you have people out here spending money like that on something as un necessary as a football game.
sssp810:
Yes, the tax rate does stay the same, but that is the point. With it you get to keep the money you did last year, without it, the government keeps the money you had last year. Who in their right minds would want to give the government anything? Whatever they touch seems to turn to rot and is wasted.
The bill should not pass at this time regardless of the consequences. Giving billions to the unemployed without paying for it up front is not fiscally responsible. No one wants to see people not have money, but there are some jobs out there that could be had. Unfortunately they pay less than the Unemployment benefits. But they are jobs that get the workers moving again.
The Bush Tax cut bill should lapse and in January, a straight up or down vote should be taken on a similar bill again.
Then a straight up or down vote can be taken on the unemployment funds, only if there is money taken from some other wasted source to pay for it. Both can then we made retroactive to Jan 1st. and not affect anyone's taxes nor unemployment insurance.
By combining the two, the President is playing politics to serve his leftist base, whereas he should be balancing our spending without killing the American worker and companies through higher taxes.
The President complained that the Republicans always say no to what the 2008 elections mandated. Now he won't come to the middle to do what the 2010 elections mandated. Turn around is fair play.
Typical. Blame the deficit on the tax rates. I respected you Mr Jubak, until now. If you are up to your eyeballs in dept, what is the first thing you do??? You cut spending.
The tax cut deal was in fact bad for us .. but only because it included unfunded spending.
In today's rigged markets you must stay diversified and not over allocate to any one area. If you do you will get screwed. Keep cash on the side in excess of what you need and pray. Oh and email your corrupt government.LOL
Jim, another great article. I’m not sure I agree with number 8. The mechanism description seems correct, but historically when the bond market takes control away from the Fed, the Fed usually sets interest rates as a trailing indicator. Kind of like someone being dragged kicking and screaming behind a horse.
The party of no is like a 16 year old girl who’s parents let the boy friend spend the night. She says no to doing her homework. She says no to giving her parent’s credit card back. However, she does say yes to a moment of pleasure that could have long ranging implications for the next two decades.
The party of no is the party of irresponsibility. My question to the Tea Party is why do you let the boy friend spend the night when you are old enough to know better?
Mr. Jubak,
Thank you for writing a clear synopsis of the Bond Market. This type of investment is hard for some to wrap their heads around, but you have made it a whole lot easier to understand.
Read Full Article »