What is happening to the bond market and what are the consequences?

Posted: June 5, 2015 in Uncategorized

It is from April that the bond market has incredible gyrations an also this week bonds are going wild again.

Bonds are the foundation of the entire world financial system and also very hard to understand for the retail investor.

In essence an increasing yield – (which does increase as an increase in risk (think a loan – decrease potential ) as inflation (brought for example by oil increase in oil price) , Federal Reserve or Reserve Bank of Australia increasing rates etc- bring a capital loss (if you sell and do not hold to maturity).

For example if the Australian yield were to return to normality (so RBA cash rate 5%), the 10 year Australian Government Bond would lose 25%! Logically if you buy at emission and hold to maturity – you will have your capital back unless Australia goes bankruptcy.

So you need to distinguish the various type of bonds and the various strategies behind that – again not the scope of this blog.

But in essence short dated corporate bond are not suffering a lot (eg Global investment grade bond rose just 19 basis point and those are on average 5 year plus and fixed interest).

The real pain is more at institutional level with US Government bond 10 years rising 30bps or the German 10 years by 51 points (from negative yield).

But the consequences can follow through to the share market as if Government Bonds give high yield they attract money from institutional investors (for Australian…shares do not give much yield overseas) creating a a money outflow and potentially a crash.

But be sure that the Federal Reserve and company are carefully watching and giving battle not to undo their Quantitative Easing induced rally.

But each fight is more gruesome.

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