Many investors remain focused on predicting exactly when and by how much the Federal Reserve will reduce its bond-buying activity and unwind its current holdings. A reduction in demand could push bond prices down and since the relationship between prices and rates mimic the motion of a see-saw, the drop in prices is predicted to push up interest rates. A common refrain is that the increase in rates may be a temporary setback for stocks, but a permanent one for bonds.
Yet is it true? A recent study looked at the performance of U.S. government bonds during four periods of rising rates over the past 3 decades: 12/1976-03/1980 (rates skyrocketed by 15.25 percentage points), 09/1992-06/1995 (3%), 11/1998-12/2000 (1.75%), and 06/2003-08/2007 (4.25%). Notably, bonds had positive returns in 3 of the 4 periods, and in 2 of the 4 periods, long bonds did better than short bonds. This may seem illogical, but can be explained in part by the reinvestment benefit of bond income at higher prices. Ultimately, efforts to forecast interest rates and bond returns may not be as simple as herds of investors seem to believe.
More Americans score jobs
On the heels of 5 straight losing sessions, U.S. stock markets leaped on Friday after a jobs report showed unemployment falling to its lowest level in 5 years. November was another great week for the auto industry, which is on pace for its best sales year in the past seven. Detroit, the birthplace of U.S. auto manufacturing, became the largest city ever to declare bankruptcy.
With more Americans finding work and the overall economy growing stronger, many are speculating that the Federal Reserve could begin to rein in its stimulus program before year end. November retail sales are due and inflation reports are expected to indicate that prices remain steady. American Airlines and US Airways will finalize their merger. Time magazine will reveal its Person of the Year.
Sources: Wall Street Journal, Bloomberg, Barron’s, CNBC, Dimensional Fund Advisors, Barclays Bank. Labor Department, Autodata, Detroit Free Press, Reuters. | Mercer Global Advisors Inc. is registered with the Securities and Exchange Commission and delivers all investment-related services. Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services.