Bond Prices at Nose-Bleed Levels – Public Jumps in With Both Feet
Investors continued to pour money into stocks last week, but piled even more cash into bonds, as exchange-traded funds made up of bonds saw their biggest weekly fund inflow on record.
Even as the stock market rallied, taxable bond ETFs drew in a one-week record of $4.49 billion, led by an all-time high weekly take by Treasury bond ETFs of $1.43 billion, according to Lipper.
WHY IN THE WORLD WOULD PEOPLE BE SO ANXIOUS TO BUY AT ALL-TIME HIGH PRICES?
Many investors are smiling about the stock market making new highs and the hope prices have more room to make new highs while bond investors SHOULD be concerned as they have an actual limit to how high prices can go and are bumping against their ceiling. Bond prices have a ceiling as their prices move the opposite direction of interest rates and can only go as high as interest rates can go low.
How much lower can interest rates go? If interest rates are as low as they can go, then bond prices have reached their peak and can only stay level or drop if/when interest rates rise.
Fortunately, stock prices do not have this ceiling as they can go as high as buyers bid them and are ultimately driven by corporate profits which can continue to rise without a ceiling.
What are bond buyers (Treasury, Municipal, Corporate,etc.) supposed to do? Those on fixed incomes are getting hammered by low-interest rates. Now, they are risking principal by owning these bonds.
I see no reason to panic as people have been saying that bond prices have peaked for the past few years, only to see them go even higher while rates have moved lower. The Federal Reserve has been doing everything in its power to drive down interest rates and until they stop doing this bond prices shouldn’t drop too much. The Federal Reserve mentioned they may take their pedal off the gas when the Unemployment Rate is in the 6% range and we have a way to go to get there.
Next week, I will be writing more about bond investor strategies. In the meantime, these three articles are good reads.
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