The State of the US Bond Market

By Parth Parikh,
Money and Investing Writer

The United States bond market is known to be the prime indicator of how the market does on a daily basis.

If treasury bonds are selling, the yields for these bonds decrease, and shows that the markets are not doing what investors are hoping for.

The same goes for when the Treasury starts buying back bonds, indicating yields are going up and the markets are up to par with investors’ expectations.

Lately though, the yields on 10-year treasury bonds have fallen and they have not made a strong comeback in quite a while.

The current interest rate (Chicago Options- ^TNX) sits at 2.05 percent, down from 2.30 percent on September 16.

Low rates translate to high yields.

The reasons why rates are falling are not too hard to find.

The obvious reason is the devaluation of the yen.

On Aug. 10, China decided to devalue its currency, the yuan, causing the biggest market-selloff in recent memory.

The move was implemented to stimulate the second largest economy in the world, behind the United States.

Minimal progress in its own markets and a dramatic downgrade in exports caused the Chinese government to take action since in China, the government has control over the economy.

Devaluing a currency, especially if it is strong, helps boost exports because it puts the currency in a more competitive state as compared to the other currencies in the market.

The devaluation triggered a massive selloff, as US markets such as the New York Stock Exchange plunged 1,126 points in the resulting days.

When markets make sudden and immediate movements like this, investors evade the markets to save their earnings and invest in 10-year US Treasury bonds for its stability and its reliability.

Another reason why bonds are becoming more expensive and lowering in yields is because of the uncertainty in the Federal Reserve and the decision whether to raise the Federal Funds rate.

Since the 2008 recession, the Federal Reserve has maintained a .25 percent interest rate and for years now, investors here and abroad have wondered when the rates will rise.

Interest rates stay low until the Federal Reserve sees enough progress in the markets to raise the rates.

Some investors have argued that seven years is enough time for markets to get back on track, while others argue that there is a standard and a place where the markets have to be at in order for the Fed to raise the rates.

Many speculators believed that the September meetings two weeks ago would be the time that the Fed officials raise the rates, yet the Fed played it safe and decided to keep the rates where they are.

After inspecting the domestic and world markets, the Fed agreed that the scene was not what they were expecting and a result, the inflation of the US dollar was not at the two percent target that they had set in order for the rates to rise.

The result of the Fed decision was a week of tumbling markets and falling stock composites, thus forcing investors to continue to flock to the bonds market and maintain the profits they have made in the markets.

We will see in the near future how the bonds do, but for an ideal market scene, the markets must do better so there is a perfect balance of stock indexes and bonds doing well.

A version of this article appeared in the Tuesday, October 6th print edition.

Contact Parth at
Parth.Parikh@student.shu.edu

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