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Thomas Kenny

Why is the Bond Market Falling?

By January 30, 2013

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Bonds have been trounced in recent days, and no segment of the market has been spared from the downturn. The yield on the 10-year U.S. Treasury note closed above 2% on Wednesday for the first time since mid-April, while municipal, corporate, high yield, and emerging market bonds have all turned lower. This is an unusual development relative to the past two to three years, as sell-offs in the investment-grade portion of the market typically haven't been mirrored in the high yield and emerging market segments.

This indicates that multiple factors are at work in the market right now. Treasuries, for their part, are experiencing rising yields due to signs of improving economic conditions and - perhaps more important - the reversal of the "flight to quality" trade that has driven rates lower in recent years. This, in turn, has led to weakness in other rate-sensitive market segments such as munis and corporates. There's more to the story, however. The market also seems to be feeling the heat from the constant drumbeat of media coverage on the bond market "bubble" and that the claims that a "Great Rotation" from bonds to stocks is inevitable. The growing unease that the market is about to tumble may be a self-reinforcing concern, and one that is weighing heavily on high yield and emerging debt.

For now, bond investors should avoid the temptation to panic. This sell-off, while coming at a time in which the chorus of those proclaiming the end of the bull market in bonds, so far is fairly tame compared to the various downturns the market has experienced at various points throughout its recent run-up. But for now, the message is clear: investors should start getting used to the fact that bonds aren't going to keep rising in price forever.

Learn more:

What is the outlook for bonds in 2013?

What are the best bond investments when rates are rising?

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