Economic Disappointments Are Piling Up, And Bonds Are Starting To Look Mighty Appealing…

Economic Disappointments Are Piling Up, And Bonds Are Starting To Look Mighty Appealing…
Stéphane Renevier, CFA

almost 2 years ago1 min

The yield on 10-year US government bonds (light blue line) has climbed by more than a full percentage point in the past 12 weeks, in its biggest move since 2003. That comes as the US Federal Reserve (the Fed) has moved to aggressively hike interest rates, and it’s led bond prices – which move inversely to yields – to suffer their biggest drop on record.

But this trend might be about to reverse course. You can see from the dark blue line above that bond yields have generally fallen when aggregate economic data has fallen short of expectations – that is, whenever there’s been a negative “economic surprise”. That makes sense, given that nervous investors have subsequently turned to the asset for safety, pushing up prices and dragging down yields. And with those negative surprises starting to pile up, the index has started to fall once again.

Considering how far bond prices have fallen, there could be a stampede for the cheap-looking assets if economic data continues to disappoint. That presents you with an opportunity: you could bet on a rebound via the iShares 7-10 Year Treasury Bond ETF (ticker: IEF, expense ratio: 0.15%), and simply use a tight stop-loss to limit losses in case you’re wrong.



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