How To Prepare For A Bear Market In Bonds

(Audio length 00:52:47)

We’re likely at the beginning of a sea change in the direction of interest rates and the overall bond market, and a recession on the horizon has important implications for bond investors.

In our recent Big Picture episode, Financial Sense Newshour’s Jim Puplava looks at where bonds are headed and what investors can do to protect themselves.

Interest Rates on the Rise

The Fed is meeting this week and is widely expected to raise interest rates for the sixth time to 1.75%, with additional rate increases a possibility later this year. Long-term interest rates have steadily risen with a recent sharp increase last fall and many experts believe that a new bear market in bonds has begun.

What this means is, many who are invested in bond funds are losing money in a market from which they’ve been conditioned to expect only falling interest rates and rising bond prices. What are the forces driving this change?

First, growth and inflation are now finally picking up. This is likely going to fuel further action from the Fed. Second, major buyers of government debt — including the Fed itself, as it clears its balance sheet, but also China and Japan — are cutting back on their bond buying.

Additionally, both growth and interest rates are picking up elsewhere, especially in Europe, where the vast majority of negative interest rate bonds were located. Puplava also explained how deficits in the US, which are on track to head back above $1 trillion next year, play an important role in the future trajectory of interest rates.

Inflation Setting In

We’re seeing inflationary pressures appear in the PPI, the CPI, the prices paid component of the ISM, and in import prices, which have a lot to do with the US dollar falling 16 percent from its highs reached in January 2017.

“We’ve gone from a very disinflationary environment … transitioning towards a more inflationary environment,” Puplava said. “It’s not going to be hyperinflation, but inflation will be increasing. So as long as economic growth continues to pick up and inflation heads higher, the Fed will continue with these gradual rate hikes until they break the markets.”