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Thomas Kenny

How Will the Fiscal Cliff Impact the Bond Market?

By November 30, 2012

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It's impossible to turn on a televsion or computer these days without hearing about the fiscal cliff, and with good reason: few events have the potential to exert such a major impact on the financial markets. On Friday, CBS Marketwatch took a look at how the various potential outcomes associated with the fiscal cliff could affect the bond market. Their conclusion: if policymakers fail to come to an agreement and the United States goes "over the cliff," U.S. Treasuries - and by extension, TIPS would be most likely to benefit in the ensuing flight to quality. In contrast, higher-risk areas of the market that are more sensitive to the economy, such as corporate, high yield, and emerging market bonds, would likely be hit hard. If lawmakers do manage to avert the cliff in time - the most likely scenario - the opposite would be true, although to a lesser extent since investors are expecting that a solution will be hammered out before the deadline. At the same time, municipal bonds should perform well in any environment because taxes are likely to rise no matter what the final outcome.

To learn more about the full range of possible outcomes regarding the fiscal cliff and how each could affect bond market performance, see the full article here.

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