A bond market bubble in the making when interest rates rise fast?
Since the Great Recession of 2008, writes Christopher P. Parr, the Federal Reserve reduced, and then held, short-term interest rates at virtually 0% in an attempt to combat a global financial crisis and stimulate the U.S. economy.
The U.S. economy, no longer in crisis mode, has been experiencing steady, consistent low-to-moderate growth. As the economy becomes healthier, it becomes necessary and desired for the Federal Reserve to begin to raise interest rates gradually, toward a more normal, long-term economically “neutral” level of perhaps 3.50%.
Bonds can effectively be used to diversify a portfolio, reduce risk and actually enhance returns under volatile stock market conditions. When interest rates rise, however, the prices of existing, lower-yielding bonds fall because investors can simply purchase newly-issued bonds at higher, current interest rates.
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