Calm Down, Bonds Aren't Going Anywhere

 | Apr 19, 2017 | 1:00 PM EDT
  • Comment
  • Print Print
  • Print

Today I want to talk about bonds. A lot of investors are excited because bonds have experienced a rally in the past couple of weeks. No doubt, it's been a nice, tradable rally, but in the big picture, bonds are not going anywhere. The larger trend is still down. The only thing that counts when talking about bonds is Fed policy or, more succinctly, the fact that the Fed is still in rate hike mode. It may be on hold at the moment, but it's still officially in rate hike mode. That's the only thing that matters. 

When bonds were in their historic bull market of the past eight years (really much, much longer), it was because the Fed was either cutting rates or holding them down at zero. Even so, you had many, many countertrend selloffs during that bull market. Conversely, we saw the benchmark 10-year fall below 2% many times, only to see the yield rally back to, or above, 2% numerous times. Each time, however, it ended up falling back down to new historic lows. 

That's because the Fed was holding policy at zero the whole time and saying nothing about raising rates. When it stopped doing that, rates started going up and bond prices started going down and that's the paradigm we've been in since the end of 2015. 

I've explained this before. The rate on a bond is simply the expectation of Fed policy over the term. Some investors recently may have become convinced that the Fed is going to shift policy again and that has caused bond prices to move back the other way (rallied), but unless the Fed comes through on that expectation, rates will ultimately converge back to where the policy direction is. 

The economic data have been unexpectedly (to some, not me) soft and that has triggered a rally in bonds on the view that the Fed may again start cutting rates. The only problem is, you're not hearing anything about that from Fed officials. Nothing. Nor do I expect them to say that. Once policy starts moving in a particular direction, it tends to stay that way. That's because rate adjustments cause price adjustments that tend not only to stick but be self-reinforcing, and also because the Fed is not wont to change policy too frequently. 

The longer the Fed keeps the current policy in place -- even if that means not hiking rates for a while -- the more likely that bond prices will fall back down and rates will rise again. 

If and when I hear the Fed start talking about cutting rates, that would be something else. Even more to the point, if the Fed actually started to cut rates, I'd switch sides and be outright bullish on bonds in a heartbeat. But not before. Right now, you have to sell rallies if you want to be on the side of the major trend. 

It doesn't even matter where the economic data are, really. If the Fed wanted to keep rates up in an economy that is tanking, it could keep rates up. That's how it works.

Columnist Conversations

The symmetry is holding up in MCD.  Target 1 is 163.34 if we continue to hold above here!  ...
As far as TSLA is concerned, I still have a higher target above the market at the 409 area.  I stated in ...
The TLT setup discussed in my last commentary is a bust. Key support was violated and it violated the recent l...
BBY is getting smoked this mornings(weak forecast).  The stock is off 8% after opening the session with a...



News Breaks

Powered by


Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.