December 28, 2013
Paul Sullivan gave NYT readers some pretty bizarre investment advice in his “Wealth Matters” column. He noted the Fed’s announcement that it would begin to cut back on its quantitative easing (QE) program, telling readers:
“Bonds are one area of concern. Since interest rates on fixed income, particularly benchmarks like 10-year United States Treasury notes, fell so much over the last few years, the view is they will begin to rise as the Fed ends its bond-buying program and the economy improves. As that happens, the value of bonds that people already own decreases.”
The problem with this story is that bond prices have already fallen, a lot. The yield on 10-year Treasury bonds fell as low as 1.5 percent last year. It is now at 3.0 percent. While it is possible, if not likely, that yields will rise further in the year ahead, the risk of big losses in value is much smaller now than it was in 2012.
The basic story here is a simple one. The markets anticipated the ending of QE and have largely incorporated it into bond prices. Other events could push bond yields higher and prices lower, but the ending of QE is not going to be one of them.
Note: Original said bond prices have risen — this was corrected.
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