In “Bond Fund Investors Beware,” I referenced Pimco’s Bill Gross’ warning that the 30 year fixed income rally may have run its course. I talked about watching the trends for any clues of a reversal rather than relying on opinions or predictions.
Let’s use Vanguard’s Total Bond Market ETF (BND) as a guide for the general directions of the bond market. Here’s a 1-year chart:
While it is not clearly visible, the price actually broke below its 39-week long term trend line last week. While this not a guarantee that higher rates are imminent, it should be interpreted as a sign of caution.
As you can see, a trend line break occurred briefly in June 09 before the rally resumed, so you can never be sure. So far, last week’s break below the line has been less than 1%, but that could change in a hurry.
You may find this confusing as the Fed has just reiterated its current stance on continuing with a low interest rate policy for the time being.
My view is that the current pullback in bond prices (leading to higher interest rates) could simply be a reaction to the ever increasing borrowing needs. Whether you look at it globally or domestically, the debt overhang continues to be tremendous, and the need for funds to fulfill obligations is at an all-time high.
In that sense, the Fed may be powerless to control monetary policy, since demand (in this case for money) could be a stronger force able to override government policy and eventually affect the economic recovery.
Disclosure: We no longer have positions in BND
Comments 1
Thanks for the informative article, as always, Ulli. I had an intuitive feeling about this topic, but you had the facts — always better!