Daily Traders Edge

The Case For Bonds

October 10
10:07 2018

In my last piece we looked at how things are going in the bond market. In summation — rates are up and bonds are down.

There are plenty of market prognosticators who are more informed than me predicting interest rates will rise further from here. The 10-year treasury yield currently stands at 3.3% or so. I’ve seen predictions that peg the 10-year at 4%, 5%, even greater than 6% yields before all is said and done.

That’s one scenario and it’s certainly a possibility. The economy could overheat. The Fed could continue to raise rates. Inflation could get out of control. Housing could go nuts. All of these things have happened in the past and could potentially happen again.

In this scenario bonds would have a tough go at it. Interest rates are much higher than they were just a couple years ago, but another 100-300 basis point increase in yields would be painful in bond land, especially if it’s coupled with higher inflation.

I find it’s always helpful to look at a variety of scenarios when thinking through any investment outlook because no one knows what the future holds. The case against bonds is one scenario.

To see the other side of this one, I want to make the case for bonds to think through what that scenario could look like.

This is a historical graph of the Fed funds rate, the short-term interest rate the Fed uses for monetary policy:

Rates are still coming off the floor and there’s no historical precedent for that so where things go from here is anyone’s guess. The Fed may continue to raise rates for the foreseeable future.

Continue Reading at A Wealth of Common Sense

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