Bond Bear Market?

US 10-year Treasury bonds briefly pierced the 4% for the first time over a year. Bond investors were panic and their concerns are understandable. The threat of rising interest rates has been hanging over fixed-income markets ever since the Fed began printing money at hyper-speed during the financial crisis.

Question now is the end near for the bond market? I am seeing clearer signs that long-term interest rates will be heading higher eventually given the massive fiscal deficit and US’ reliance on foreign lenders. The ultimate day of reckoning for the bond market is coming, but it is likely to be over time, not overnight.

But it makes prudent sense to begin taking steps to help protect your portfolio against rising interest rates when they occur. What this really boils down to is timing and it is important to understand where and how to make the right moves with your fixed-income holdings. Right now, economic fundamentals still appear too weak for inflation to take hold and the Fed intends to keep interest rates low for an ‘extended period’ as they have repeatedly broadcast. The broad money M2 is still contracting at a record rate, in spite of the Fed’s runaway printing press. The trouble is the Fed’s liquidity is not getting circulated back into the real economy as outstanding bank credit contracts at close to a 5% annual rate.

In essence, the shorter the maturities of your portfolio, the lower the yield but shorter maturities are also less sensitive to price changes as interest rates fluctuate. Bu adding medium-term maturities and emerging market bonds, we may be able to kick-up cash-flow even more.