April 7 2016
It’s like déjà vu all over again!
This wasn’t the first quarter, or even the first year, that bond markets have not performed in the way Wall Street strategists have expected.
During 2014, bond yields were expected to rise. They did not.
During 2015, bonds were predicted to finish the year yielding about 2.8 percent to 3.3 percent. On December 31, they were at about 2.3 percent.
During the first quarter of 2016, despite persistent predictions yields would move higher after the Federal Reserve’s rate hike, yields fell and bond values increased. Government bonds delivered the strongest returns gaining 3.7 percent for the quarter, according to Bloomberg.
There is an inverse relationship between interest rates and bond prices. When rates move higher, bond prices move lower, and the value of investors’ holdings may fall. When rates move lower, bond prices move higher, and the value of investors’ holdings may increase.
The current bull market in bonds started in 1982. During January of that year, the 10-year U.S. Treasury yield was about 14.6 percent. Since then, rates on Treasuries have declined and investors have reaped the rewards of steadily rising bond values.
The Federal Reserve began tightening monetary policy in December 2015 by raising the fed funds rate. Late in the month, the rate on benchmark 10-year Treasury bonds reached about 2.3 percent. However, after central banks in Europe and Japan loosened their monetary policies, yields on Treasuries moved lower. By the end of the first quarter of 2016, they were at about 1.8 percent.
Overseas, the picture was a bit more complicated. An expert cited by Bloomberg explained, “Of the five countries that performed best – Germany, Belgium, Denmark, Japan, and the United Kingdom – the two-year debt of all but the United Kingdom has negative yields.”
When bonds have negative yields, investors are paying to lend their money. Why would anyone do that? The Economist reported there are three types of investors who buy bonds when yields are negative: 1) central banks and other entities that must own government bonds, 2) investors who expect to make money when a country’s currency gains value, and 3) investors who would rather suffer a small loss in government bonds than risk a bigger loss investing in something else.
That something else might have been a stock market during the first month or so of the quarter.
Globally, stocks underperformed bonds, returning 0.4 percent for the first quarter of 2016. However, the end-of-quarter return doesn’t really tell the whole story. Fears of global recession, among other things, produced a wild ride for stock market investors during the first months of the year. Worldwide, stocks were down about 11.3 percent through mid-February, according to Barron’s, and then gained 13.2 percent to end the quarter slightly higher, overall.
The United States delivered strong returns for the period. Barron’s reported:
“Still, the United States fared a good deal better than other developed markets, with Europe down 2.4 percent, the United Kingdom off 2.3 percent, and Japan worse by 6.4 percent – a surprise because overseas markets were touted as the places to be. That is, except for emerging markets; but their results also confounded the seers, as they returned a robust 5.8 percent for the quarter.”
At the end of last week, the Bureau of Labor Statistics’ monthly jobs report showed more people were looking for jobs, increases in employment exceeded analysts’ expectations, and average hourly earnings had moved higher. These were positive signs for the U.S. economy.
- Data as of 4/1/161-WeekY-T-D1-Year3-Year5-Year10-Year
- Standard & Poor’s 500 (Domestic Stocks)0.0180.0140.0060.0990.0920.048
- Dow Jones Global ex-U.S.0.3-2.8-12.5-1.8-2.2-0.6
- 10-year Treasury Note (Yield Only)1.8NA22.214.171.124.9
- Gold (per ounce)-0.614.31.4-8.5-3.17.5
- Bloomberg Commodity Index-1.7-0.8-22-17-14.4-7.3
- DJ Equity All REIT Total Return Index126.96.36.1991.56.7
*Indices are unmanaged and investors cannot invest directly in an index.
*Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
*S&P 500, Gold, Dow Jones Global ex-Us, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend).
*The DJ Equity All REIT Total Return Index does include reinvested dividends.
*All investments involve risk – coins and bullion are no exception. The value of the bullion and coins is affected by many economic circumstances, including the current market price of bullion, the perceived scarcity of the coins and other factors. Therefore, because both bullion and coins can go down as well as up in value, investing in them may not be suitable for everyone. Since all investments, including bullion and coins, can decline in value, you should understand them well, and have adequate cash reserves and disposable income before considering a bullion or coin investment.