Making Money Alert

Higher Interest Rates and a 1987 Market Redux

If you want to find out what the market is really worried about, just watch the action in the bond market. This is something investors have learned over the years, and it’s why there’s a market adage that says that the bond market is smarter than the stock market. This premise seems to be particularly important to remember right now, as the bond market is telling us interest rates are on the march.

We saw this worry flare-up in earnest in May, when the Federal Reserve’s initial quantitative easing “taper talk” caused an exit from Treasuries and a big spike higher in bond yields, i.e. interest rates. Remember, bond prices and bond yields have an inverse relationship.

After that initial spike in yields on the benchmark 10-year Treasury note, we saw yields pull back in July as the taper talk settled down. Now, however, the market is betting on some form of scale back to the Fed’s $85 billion per month bond-buying scheme, and that’s pushed yields, i.e. long-term interest rates, back to just under multi-year highs.

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