by: Doug Ralph, June 25th, 2013
The recent rise in Bond yields has been dramatic if not a little alarming.
Last October I spoke at the BC Seniors Living Association Convention in Kelowna. At the time and lasting up until a few days ago, there was relative complacency towards the prospect of rising interest rates. Preparing for my presentation, I came across an article from Fortune Magazine from 1994 (see link below) detailing the bloodbath in global bond markets at that time. It struck me that the global backdrop then was eerily similar to what we have today in many respects but that even though there was a slack economy and low inflation, bond yields rose dramatically. My point was to expect the unexpected and that rates can rise fast in a seemingly benign environment.
Although the world was a different place then (they actually printed magazines) and the triggers for the rise in yields may be different; then, political assassinations and instability in Mexico and today recent fears involving Greece, the Euro-zone and China. In the end it was the US Fed that threw the first grenade.
Recent testimony by Ben Bernanke interpreted to be alluding to a reduction of the Fed’s QE by the end of the year spooked the bond markets. Where we may have been fearful of what would happen when the Fed took away the punch bowl, what is somewhat alarming was that the damage was done by merely a sideways glance by the Fed in the punch bowl’s general direction. The Fed seems to realize this and seems to be trying to backtrack a little.
Is it a bit of a freak-out and overreaction to Mr. Bernanke’s fed testimony or the first signs of another looming Financial Crisis? Time will tell. The point is -now, just as it was then- if you are a fixed income investor or a big borrower, be ready, be prepared and expect the unexpected.
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