We’ve seen markets get spooked recently as 10-year Treasury yields have continued to climb. On our recent Lifetime Income program, Jim Puplava delves into bond risk and what it means for your portfolio.

Bond Market Risk Ahead

We’re in the middle of a Federal Reserve rate raising cycle right now, and this may be setting the stage for bond market losses for many investors.

To start, the Fed has signaled that it intends to raise rates three times this year, and possibly into next year as well.

“That would take the Fed Funds rate from 1.5 to about 2.25%,” Puplava said. “Short-term rates are rising, but we’re also seeing medium-term rates break out. The 10-year Treasury note is now at 2.75%, with the possibility that we could see 10-year notes get up to 3 percent this year.”

When interest rates rise, the value of existing bonds decline. Bond values have been increasing since we saw record low-interest rates in the summer of 2017, Puplava stated, and rising rates mean falling bond prices.

Multiple Drivers at Play

But interest rate increases aren’t the only catalyst for bond risk. There are a number of drivers here, including anticipation of the pickup in economic activity, rising wages, rising oil and commodity prices, and overall fears of inflation.

It appears the era of easy monetary policy is coming to an end, here, in Canada and England, Puplava stated, and possibly next year as the Bank of Japan and the ECB are expected to begin raising interest rates.

The Fed is shrinking its balance sheet, as well, which is withdrawing $30 billion a month in liquidity out of the bond market.

Deficits are increasing, and a lot of that is on automatic pilot due to increases in entitlements, Puplava said. All of these factors play into anticipated increases in bond risk.

“There are a number of factors that are all converging that are probably going to drive inflation and interest rates higher down the road,” Puplava said. “The important thing is … if you are in a bond fund, chances are, the bonds in the fund are long-term bonds, meaning that they’re impacted by an increase in interest rates.”