Could 2021 Be One Of The Worst Years On Record For The Bond Market?

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The 10-year Treasury has seen yields rise and prices fall since last summer. What would a bad year look like?

One measure of money in the U.S. economy called M2 by economists, spiked around 20% over the past 12 months as a result of efforts to fight the pandemic with stimulus checks, enhanced unemployment payments, PPP loans and other government spending. That sort of spike over a short period is unprecedented. Some economists worry inflation will result. If it does that it seldom a good outcome for bonds.

Of course, perhaps we should not view zero as the lower bond for yields, since in France, Germany, Switzerland and the Netherlands yields are negative. That implies it’s possible that bond yields still go lower from here. Still, that’s not the direction they are trending in since last summer. Also, unlike in decade past, less income is available from bond yields. It’s harder, mathematically speaking, for a bond to have a negative year, when it’s paying a 15% yield, than when that same bond offers just 1%.

However, even a bad year for bonds is likely to be pretty tame compared to what we could see in a bad year for stocks. If the bond market is stuttering because of investors shifting to riskier positions, that’s less worrying for stocks, but if an inflation spike is coming, stock investors may have cause to worry.

 

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