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Bonds Can’t Sit With Us


Image source: Nathan Bai / Shutterstock.com

What's going on?

A global selloff of bonds accelerated on Wednesday as investors bet on continued economic growth and markets heard that China, the world’s biggest holder of US government bonds, is considering paring back its gargantuan appetite for Uncle Sam’s debt.

What does this mean?

Bloomberg reported early on Wednesday that senior Chinese government officials had recommended slowing or halting the purchase of US government bonds. Although it’s debatable whether China would shake things up enough to have a dramatic effect on US bond prices, the size of its holdings meant the news got investors’ attention.

More broadly, improving global economic growth has put bond prices under the cosh. In a world of sunshine and rainbows, investors tend to want to own stocks, which benefit directly from higher growth as companies’ profits increase.

Why should I care?

For you personally: Lower bond prices mean higher interest rates — for you. (tweet this)

As bonds go down in price, they offer higher interest rates to investors (because a new investor would buy the bond for a lower price, but the fixed amount the bond pays out each year remains the same). These higher interest rates — technically called bond yields — are typically reflected in the interest rates that banks offer to their borrowers (including mortgagers).

For markets: Rising interest rates hold risks for stocks.

While stocks are a very popular investment right now, many investors think they’re only really appealing on a relative basis. If bonds sell off a large amount, such that their interest rates become much higher, investors may suddenly find bonds relatively more attractive then stocks (given stocks are typically viewed as “riskier”) — putting downward pressure on stock prices. Whether or not the bond selloff continues to gather pace throughout this year likely depends largely on whether inflation increases meaningfully and sustainably (inflation is bad for bonds because it makes bonds’ cash payments, which are usually fixed, worth less in the future).

Originally posted as part of the Finimize daily email.

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