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A Funny Thing Happened on the Way to the Bond Rout...

By    |   Tuesday, 21 Jan 2014 04:51 PM

Despite dire predictions, bonds have performed surprisingly well this year — so far.

The economic recovery powered by the Federal Reserve's bond-purchase program was expected to prompt rising yields that would crush bond values, because prices of fixed-income securities generally fall as yields rise. Many pundits predicted investors would bail out of bonds and jump into stocks, which were expected to offer much better returns, in what some called a "great rotation."

That scenario may still pan out this year, but so far in 2014 bonds have defied conventional wisdom and actually outperformed stocks, points out The Economist.

Editor’s Note: Secret ‘250% Calendar’ Exposed — Free Video

"If inflation remains low in the developed world and the recovery does not accelerate wildly, 2014 may live up to its benign beginnings for bonds," the magazine predicts.

Instead of rising, ten-year government bond yields dropped in the U.S. and Europe, notes The Economist. Rising yields in emerging market sovereign debt also failed to materialize, and yields for some peripheral eurozone countries fell significantly.

"The good start reflects factors that are specific to America and to Europe as well as common influences," The Economist explains.

The common view is that bond values will plummet as the economy improves and the Fed winds down its massive asset-purchasing stimulus, prompting rising yields. Yet none of those inter-related trends is on a set schedule or even guaranteed, The Economist says.

A poor December jobs report gave markets reason to believe the Fed might be timid in its tapering. Don't go by the falling unemployment rate. That's largely due to low workforce participation rate.

We can forget the Fed's previous statement that it might start raising rates when unemployment reached 6.5 percent. In December the central bank said it would
keep rates down "well past the time" the unemployment rate fell below 6.5 percent.

Investors should also think about low inflation levels, The Economist argues, noting that inflation in the U.S., Britain and the eurozone is extremely low.

Many experts hold a much dimmer view of bonds. The Barclays U.S. Aggregate Bond Index plunged 2.1 percent last year.

"2013 is a taste of what we may be seeing the next couple of years," Morgan Stanley financial adviser Shawn Rubin told The Wall Street Journal.

Wesley Phoa, portfolio manager for American Funds, says 30-year Treasury bond prices will fall about 15 percent if yields return to long-term averages, according to the Journal.

Editor’s Note: Secret ‘250% Calendar’ Exposed — Free Video

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Despite dire predictions, bonds have performed well so far this year, and The Economist says, "If inflation remains low in the developed world and the recovery does not accelerate wildly, 2014 may live up to its benign beginnings for bonds.
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2014-51-21
Tuesday, 21 Jan 2014 04:51 PM
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