What's Driving Down Bond Prices—and What It Means for Investors
Tagged in:
Tap to Read Full Story

Bonds are usually considered boring, but they’ve taken a wild turn over the past couple of weeks. From Election Day through November 18, the Bloomberg Barclays Global Aggregate bond index dropped about 4.1 percent—and that’s after rising more than 10 percent between November 2015 and August 2016.

Compare that to the stock market which, after sinking on election night, has since risen to new highs.

[ad 1]

From Election Day through November 18, the Dow Jones Industrial Average jumped more than 600 points and Standard & Poor’s 500-stock index climbed about 2 percent. The rally’s been attributed in part to expectations that President-elect Donald Trump will cut corporate taxes and roll back regulations, both of which can benefit companies’ bottom lines.

So, why are bond prices falling?

For one, the stock market has stolen both the bond market’s thunder and capital. “Given the enthusiasm in the stock market, we’ve seen a lot of funds diverting away from bonds,” says Certified Financial Planner Avani Ramnani, director of financial planning and wealth management at Francis Financial in N.Y.

Another factor is the expectation that interest rates will soon rise. On November 17, Federal Reserve Chair Janet Yellen primed the market to expect the federal funds rate to go up in December. That can push bond prices down because when interest rates rise, investors can get better returns from other investments.

There’s also a question of supply and demand. Trump has made it clear he wants to lower taxes and spend money, so we’ll probably experience larger deficits, which means that we’ll be seeing more bond issuance at auctions,” says Pete Woodring, registered investment adviser and founding partner of Cypress Partners in San Francisco. More supply, plus the same or lower demand, means lower prices. 

What’s that mean for me?

The uptick in the yield for the 10-year Treasury bond may (surprisingly) have implications for home buyers, too. It typically means fixed mortgage rates will increase, as they’re closely linked. In fact, over the past week, the average 30-year fixed mortgage rate bumped up from 3.77 percent to 3.96 percent, according to Bankrate.com.

So, if you’re planning to buy a home, factor in that mortgage rates are likely on their way up. The good news is they’re still near historic lows—and likely to rise slowly. So you have time.

If you’re an investor in bonds or bond funds, don’t worry too much about the drop. Assuming you have a well-diversified portfolio, you should be prepared to ride out these kinds of market churns—whether in stocks or bonds.

“The worst thing to do in a volatile market is to pull out or do something drastic,” says Ramnani. “Let the market absorb the news, let all the price mechanics work out.” And keep the focus on your long-term investing plan, not on short-term movements.

Related