Bond Market Unsettled by Inflation Concerns

At one point this month, for example, the S&P 500 was down more than 10 percent, in the range known in market parlance as a correction, and the Nasdaq Composite Index was down more than 20 percent, in what Wall Street labels as market territory. , though both have since recovered. Still, the S&P 500 on Friday is down 4.7 percent for 2022, and the Nasdaq is down more than 9 percent.

Historically bad bond yields are nothing compared to periodic stock market crashes. For example, in February and March 2020, the first days of the coronavirus pandemic, the S&P 500 fell almost 33% in just 23 trading days. Nonetheless, the double whammy of poor bond yields combined with poor stock market returns in the same stretch leaves many diversified stock and bond portfolios in a state of distress.

The Vanguard Balanced index fund, a simple mix of 60 percent stocks and 40 percent bonds, is down 5.8 percent for the year. Bonds, which typically serve as a buffer insulating investors from the volatility of their stock holdings, have not played that role well this year.

The culprit for the sharp drop in bond values ​​is the rise in interest rates that accelerated in fixed income markets in 2022, when inflation took off. Bond yields (also known as interest rates) and prices move in opposite directions.

The interest rate increase has been expected by bond market pundits for years. It is the suddenness of the recent increases that has caused a stir in the Steady Eddie bond market.

Consider that in August 2020, in the first year of the pandemic, the yield on the benchmark 10-year Treasury note fell as much as 0.5 percent. The Federal Reserve, which has direct control of the short-term fed funds rate but not bond market rates, had cut that short-term rate to almost zero, as it had done in 2008, during the crisis. financial.

In both cases, the Fed and the US government, through fiscal stimulus, were making extraordinary efforts to revive the economy: low interest rates encourage borrowing and business, as do higher rates. they discourage her.

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