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Bonds Got Hit

I have been writing, talking, and even ranting about duration, ultra-low interest rates, and the inevitability of higher rates and thus, lower bond prices (link). However, rates kept driving down to historic lows. But maybe it is finally time.

The interest rate on the 10-year Treasury rose off the bottom of 1.7% in May and broke through a 7-year trend line to 2.7%, as of this writing. Bonds prices dropped dramatically (link).

Our government needs to hold interest rates down to avoid the compounding effects of higher interest payments on the existing debt. In addition, our government needs to hold interest rates down until growth is strong enough for the economy to stand on its own. Their plan is to create new money, buy bonds, and keep interest rates low until the economy revives (Quantitative Easing). Inflation will then pick up along with higher wages. Deficits will subside due to higher taxes from a growing economy. Total debt will shrink in real terms due to controlled inflation, and interest rates will rise slowly. That is the plan.

They will do whatever it takes….which is to print money and buy bonds. The Fed simply cannot stop. Interest rates must stay down. But so far, little of this money has found its way past the stock market into wages. Hence, there is no growth. Their plan is not working.

GDP is growing at about an anemic 1.5% so far this year (link).

The July employment report confirms (as follows): link

I see no economic strength driving rates higher. The unemployment reports have not been positive. Full time, breadwinner jobs ($35,000+) are scarce and other employment measures are not good. The economy does not point to higher interest rates. The Fed has no reason to stop its Quantitative Easing maintenance of low interest rates.

However, the risk of principal loss has shown itself. Maybe something else is at play. Maybe with dividend yields so low, it is not worth the risk.

As always, it is not easy to see forward.