DANGERS SURROUNDING BONDS THIS TIME
So far, 2016 is not a good year for bonds. The Federal Reserve stands pat on its plan to escalate interest rates even more. Stock markets continue to suffer erratic movements, making traders anxious. Oil prices are slumping as leading producers failed to agree on capping output. Let’s make it worse; China is experiencing slight economic improvement.
This market is somewhat at the edge of plunging further, to the extent it might reach its lowest low. Here’s why.
The flattening yield curve is apparent in the Treasury market, attributing it to increasing or decreasing interest rates. Investors, at least most of them, are endeavoring to move away from short-term securities. Expect a flat yield curve when you notice a minimal difference between the rates of bonds (when looking at its rates). Unlike long-term securities, short-term bonds are escalating much swiftly.
Rates and prices hold an inverse relation. Hence, the likelihood of prices descending is greater. Last December 2015, this was the first time Federal Reserve hiked interest rates since 2006. Since then, the US central bank reiterated they will slowly raise rates based on present market situations.
High-yielding bond market is the most perilous among the three. This sector endured a considerable sell-off in the second half of last year. Fixed-income bonds from oil and gas entities comprise a significant portion of the market. Crude prices have been slumping since the summer of 2015. The world’s top oil producers are not awaited to limit output anytime soon. Sure, oil companies can hedge against difficulties, prices remain low.
Traders are anxious the present and pressing market situations greatly affect the market. More rate hikes are looming. Oil and gas entities are perhaps close to declaring bankruptcy, which would result in defaulting on bonds. Treasury notes have noticed a flattening yield curve due to escalating rates.
If you are still thinking of venturing in bonds, proceed with caution. Be mindful of the latest events encompassing bonds and its market.
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