Moe Zulfiqar: The U.S. bond market seems to be the topic of discussion among investors these days. The pundits of the financial media are constantly screaming out their stance on where it’s headed next and how it will play out for the investors who are involved.
While the majority seems to be favoring a possible downturn in the U.S. bond market, others are saying we might stay at these levels for some time, and are even suggesting buying on the dips. No matter what their opinion may be, they all seem to have solid reasons for their take.
Aside from this, what we already know is that bond yields are on the rise. I mentioned in these pages not too long ago that May wasn’t a great month for the bond market—the momentum was more towards selling. Yields on 10-year and 30-year U.S. Treasuries have surged significantly over the course of the month.
Remember, rising yields of 10-year and 30-year U.S. Treasuries are important for the entire U.S. bond market, because they act as a benchmark for other types of bonds, such as corporate bonds.
Looking at the selling in the U.S. bond market and the increased talks of downturn, I question how big of an impact a collapse in the bond market could really have on the overall wealth of investors and how much money is on the line.
According to the Securities Industry and Financial Markets Association, the outstanding U.S. bond market debt stood at $38.13 trillion at the end of the fourth quarter of 2012. (Source: “Statistics,” Securities and Financial Markets Association web site, last accessed June 6, 2013.) This includes all bond market securities, such as corporate debt, municipal debt, and federal government debt, among others.
As per the Investment Company Institute’s 2013 fact book, at the end of 2012, there were 1,962 long-term bond mutual funds and 391 closed-end funds—funds that trade on the stock exchange or over–the-counter markets. (Source: “Number of Funds of the Mutual Fund Industry,” Investment Company Institute web site, last accessed June 6, 2013.) Keep in mind that these numbers are for the funds containing only bonds in their portfolios; there are many other funds that hold a mixture of stocks and bonds, as well.
To give you some idea about their holdings, the total long-term bond mutual funds have assets of $3.42 trillion. (Source: “Total Net Assets of the Mutual Fund Industry,” Investment Company Institute web site, last accessed June 6, 2013.)
Without a doubt, just using the figures mentioned, there’s a significant amount of money at stake.
If the yields on the U.S. Treasuries continue to increase, the losses of bond investors will continue to mount higher. As a result, we might just see more selling from investors liquidating their positions. Note that this is by no means a suggestion to go out and sell bonds, but just a mere example of how big an impact a sell-off in the bond market can actually have on the wealth of investors across the board.
What you need to keep in mind is that investors rushed to the bond market because of low interest rates, easy monetary policy, and economic uncertainty. Now, there are speculations of the Federal Reserve slowly moving away from its easy monetary policy, especially of it slowing the rate of its current quantitative easing. Bond investors shouldn’t lose sight of this.
And on top of it all, it appears the conditions in the U.S. economy may be getting better. The unemployment rate is lower than what it was during the financial crisis, consumers seem to be spending more, and the banks are in much better shape than before.
This article is brought to you courtesy of Moe Zulfiqar from the Daily Gains Letter.