Lombardi Publishing Corporation, a 28-year-old consumer publisher that has served over one million customers in 141 countries, cautions investors to avoid the U.S. bond market as the Federal Reserve pulls back on its monetary stimulus package.
“The Federal Reserve has been the biggest driver of bonds since the financial crisis began in 2008,” says lead contributor and financial expert Michael Lombardi. “From the outset, the central bank quickly lowered its benchmark interest rate to near zero, then initiated quantitative easing, all of which resulted in the bond market soaring with yields collapsing to multi-decade lows.”
That changed in May 2013, when the Federal Reserve hinted it would begin to taper its quantitative easing strategy. Bond yields reversed as investors panicked about when the tapering would begin. Between June and December 2013, investors sold $176 billion worth of long-term bond mutual funds. Since May, bond yields have climbed steadily, from 2.8% to 3.6%, an increase of more than 25%. (Source: “Historical Flow Data,” Investment Company Institute web site; http://www.ici.org/info/flows_data_2014.xls, last accessed February 26, 2014.)
What does the future hold for the U.S. bond market? Lombardi explains that the Federal Reserve is slowly taking away the “steroids” that boosted the bond market. The central bank is now printing $65.0 billion of new money a month instead of the $85.0 billion it was printing in late 2013, and it is expected that the Federal Reserve will be slowing its purchases by an additional $10.0 billion per month throughout 2014.
“As a result, it wouldn’t be a surprise to see more and more investors dumping bond mutual funds throughout 2014,” he adds. “China is slowly exiting the U.S. bond market, too. In December, China sold the biggest amount of U.S. bonds since 2011; reducing its bond holding by $47.8 billion, or 3.6%. This leaves China with $1.27 trillion worth of U.S. bonds.” (Source: Eddings, C. and Kruger, D., “China Cuts Treasury Holdings Most Since 2011 Amid Taper,” Bloomberg, February 18, 2014; http://www.bloomberg.com/news/2014-02-18/china-cuts-treasury-holdings-most-since-2011-amid-taper.html.)
When it comes to the U.S. bond market, Lombardi only sees risk. The Federal Reserve, the key backer of lower bond yields over the last five years, is pulling back on its money-printing program, which was what fueled the bond market’s rally in the first place. In addition, China is also pulling back on its holdings of U.S. Treasuries. The question remains: who will buy U.S. Treasuries if both the Fed and China are backing out? Won’t rates on bonds need to rise in order to attract more buyers to them?
“The bond market is setting up for an imminent sell-off, and while many retail investors take the bond market lightly, a falling bond market will have a massive negative impact on the stock market and the housing market—a caution for investors,” Lombardi concludes.
Founded in 1986, Lombardi Publishing Corporation, which has served over one million customers in 141 countries, is one of the largest consumer information publishers in the world. For more information on Lombardi Publishing Corporation, visit the company’s web site at www.LombardiPublishing.com.
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