The past 10 years will likely be written in history as the “Decade of U.S. Bonds.” Since 2002, the price of 10-year Treasuries has doubled.
The question becomes, “Is it over?”
With interest rates on the floor, at 0.25%, many analysts see the future of bonds as a one-way road. Interest rates can’t really go lower, so bond prices shouldn’t be able to go much higher.
At least that’s the theory, based on the common understanding that interest rates and bond prices move inversely.
Yet, the past three years have proven that bond prices can go higher even in the absence of falling interest rates.
So I have two charts today…
First, here’s the Fed Funds Rate going back to 2006. Between mid-2007 and the beginning of 2009 the Fed lowered interest rates from 5.25% to under 0.25%
This drop in interest rates led to bond prices surging 40% over the same timeframe.
But that’s when economic theory and reality began to diverge. Since 2009, interest rates have held steady below 0.25%. Many would expect bond prices to move sideways… just as interest rates moved sideways.
That was not the case. Bond prices have increased another 33% from mid-2009 to present.
With the Fed pledging to keep interest rates at current levels until 2015, you have to wonder if we’ll see yet another 30+ percent gain in bond prices over the next few years.
I think bonds are bubbling and will eventually succumb to an inevitable bust. But this is a strong, persistent trend that is risky to trade against in the short-term.
In a world of relatives, U.S. bonds may still be the least bad option among a pool of even worse alternatives.
If you haven’t done so already read the Survive & Prosper issue on “Healthcare Costs Soaring by Many Times Inflation Rate”