Rule is that Bond Prices will decrease as interest rate increase. The consensus is the FED will raise interest rates in the next few months. Considering that, why are Bond Prices now increasing?
Specifically, why has TLT gone up 2% in a week?
Bond Prices and Anticapted FED Increae
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Bond Prices and Anticapted FED Increae
Last edited by mcshade725 on Mon Aug 03, 2015 9:24 pm, edited 1 time in total.
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Re: Bond Prices and Anticapted FED Increae
What changes are you trying to make based off this info?
I know nothing!
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Re: Bond Prices and Anticapted FED Increae
Bond prices are determined by the markets, not the Federal Reserve. The Fed can only indirectly influence prices through monetary policy decisions, such as setting the overnight interest rate for bank borrowing.
Rick Ferri
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Re: Bond Prices and Anticapted FED Increae
My rudimentary understanding aligns with Mr. Ferri's explanation ---the market sets the rates based on economic conditions and inflation expectations. I am a big fan of Mr. Ferri, and if you want to K-I-S, he believes most of us are better off riding out multiple economic regimes in intermediate-term bonds. (link)
http://www.rickferri.com/blog/investmen ... ond-funds/
To your question, " why are Bond Prices now increasing?" As far as what happens on a day to day basis with bonds --and stocks for that matter --they can be temporarily mis- priced by Mr. Market. Mis-pricing is caused by mis-perceptions. As Ben Graham noted:
"Very frequently appraisals of value are based on mob psychology, on faulty reasoning, and on the most superficial examination of inadequate information. "
It is very difficult to think about bonds, and considerations for duration laddering in one's portfolio, without having some sort of economic outlook. Today (7-30) the revised 1-Q-15 GDP number was released, along with the preliminary 2-Q-15 GDP number. Both suggest fairly tepid economic growth. A bond investor might also consider the implications of the recent collapse in commodity prices, sluggish global growth, and hints from yesterday's Fed meeting (7-29-15) that inflation is pretty subdued. In sum, bond traders may be re-setting their future expectations after they recently pushed rates to yearly highs.
Should you desire to dig a little deeper and want to give consideration to macro-economic factors that influence bond prices...FWIW...I have found the commentary from Lacy Hunt* at Hoisington Management's Quarterly "Review and Outlook" (link) to be enlightening. His in-depth understanding of economics and the bond market gives me much better insight regarding how to position the bond side of my portfolio.
http://www.hoisingtonmgt.com/pdf/HIM2015Q2np.pdf
From Dr. Hunt's latest quarterly note, he notes four mis-perceptions that may be present in the minds of bond traders:
" Presently, four misperceptions have pushed Treasury bond yields to levels that represent significant value for long-term investors. These are:
1. The recent downturn in economic activity will give way to improving conditions and even higher bond yields.
2. Intensifying cost pressures will lead to higher inflation/yields.
3. The inevitable normalization of the Federal Funds rate will work its way up along the yield curve causing long rates to rise.
4. The bond market is in a bubble, and like all manias, it will eventually burst."
Disclosure: I believe the recent back-up in long-term treasury yields presented a good opportunity to re-allocate another 10% from intermediate to long- term duration. I am now holding 35% long-duration bonds. Today's GDP numbers suggest to me the economy is far from "off to the races." Y-o-Y inflation trend is running at 0.1%. At 3% or higher on a risk-free treasury bond, it appears to offer a pretty good risk-reward proposition vs. stocks at Shiller P/E of 26.
Good luck in the markets!
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
*Lacy Hunt is the author of two books, and numerous articles in leading magazines, periodicals and scholarly journals. Included among the publishers of his articles are. Barron’s, The Wall Street Journal, The New York Times, the Journal of Finance, the Financial Analysts Journal and the Journal of Portfolio Management. Previously, he was Chief U.S. Economist for the HSBC Group, one of the world’s largest banks. A native Texan, Dr. Hunt also served as Senior Economist for the Federal Reserve Bank of Dallas.
http://www.rickferri.com/blog/investmen ... ond-funds/
To your question, " why are Bond Prices now increasing?" As far as what happens on a day to day basis with bonds --and stocks for that matter --they can be temporarily mis- priced by Mr. Market. Mis-pricing is caused by mis-perceptions. As Ben Graham noted:
"Very frequently appraisals of value are based on mob psychology, on faulty reasoning, and on the most superficial examination of inadequate information. "
It is very difficult to think about bonds, and considerations for duration laddering in one's portfolio, without having some sort of economic outlook. Today (7-30) the revised 1-Q-15 GDP number was released, along with the preliminary 2-Q-15 GDP number. Both suggest fairly tepid economic growth. A bond investor might also consider the implications of the recent collapse in commodity prices, sluggish global growth, and hints from yesterday's Fed meeting (7-29-15) that inflation is pretty subdued. In sum, bond traders may be re-setting their future expectations after they recently pushed rates to yearly highs.
Should you desire to dig a little deeper and want to give consideration to macro-economic factors that influence bond prices...FWIW...I have found the commentary from Lacy Hunt* at Hoisington Management's Quarterly "Review and Outlook" (link) to be enlightening. His in-depth understanding of economics and the bond market gives me much better insight regarding how to position the bond side of my portfolio.
http://www.hoisingtonmgt.com/pdf/HIM2015Q2np.pdf
From Dr. Hunt's latest quarterly note, he notes four mis-perceptions that may be present in the minds of bond traders:
" Presently, four misperceptions have pushed Treasury bond yields to levels that represent significant value for long-term investors. These are:
1. The recent downturn in economic activity will give way to improving conditions and even higher bond yields.
2. Intensifying cost pressures will lead to higher inflation/yields.
3. The inevitable normalization of the Federal Funds rate will work its way up along the yield curve causing long rates to rise.
4. The bond market is in a bubble, and like all manias, it will eventually burst."
Disclosure: I believe the recent back-up in long-term treasury yields presented a good opportunity to re-allocate another 10% from intermediate to long- term duration. I am now holding 35% long-duration bonds. Today's GDP numbers suggest to me the economy is far from "off to the races." Y-o-Y inflation trend is running at 0.1%. At 3% or higher on a risk-free treasury bond, it appears to offer a pretty good risk-reward proposition vs. stocks at Shiller P/E of 26.
Good luck in the markets!
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
*Lacy Hunt is the author of two books, and numerous articles in leading magazines, periodicals and scholarly journals. Included among the publishers of his articles are. Barron’s, The Wall Street Journal, The New York Times, the Journal of Finance, the Financial Analysts Journal and the Journal of Portfolio Management. Previously, he was Chief U.S. Economist for the HSBC Group, one of the world’s largest banks. A native Texan, Dr. Hunt also served as Senior Economist for the Federal Reserve Bank of Dallas.
“Everyone is a disciplined, long-term investor until the market goes down.” – Steve Forbes
Re: Bond Prices and Anticapted FED Increae
The short version is that the that particular part of the consensus has been priced in long ago. The market doesn't like to wait until you hear about it. You can look to the early part in the year or even as far back as 2013 for the major repricings.
Now it's about chances that it might not happen or it might be slower than believed, and/or the comparative lackluster expectations for equities. I.e. bonds become more attractive if expectations for alternatives are reduced.
Now it's about chances that it might not happen or it might be slower than believed, and/or the comparative lackluster expectations for equities. I.e. bonds become more attractive if expectations for alternatives are reduced.
Re: Bond Prices and Anticapted FED Increae
^^^^ This.ogd wrote:The short version is that the that particular part of the consensus has been priced in long ago. The market doesn't like to wait until you hear about it.